Supports: Microeconomics, Chapter 6, Section 6.3 and Chapter 10, Section 10.3, Economics Chapter 6, Section 6.3 and Chapter 10, Section 10.3, and Essentials of Economics, Chapter 7, Section 7.4 and Section 7.7.
In August 2022, an article in the Wall Street Journal discussed the Disney Company increasing the prices it charges for admission to its Disneyland and Walt Disney World theme parks. As a result of the price increases, “For the quarter that ended July 2 , the business unit that includes the theme parks … posted record revenue of $5.42 billion and record operating income of $1.65 billion.” The increase in revenue occurred even though “attendance at Disney’s U.S. parks fell by 17% compared with the previous year….”
The article also contains the following observations about Disney’s ticket price increases:
- “Disney’s theme-park pricing is determined by ‘pure supply and demand,’ said a company spokeswoman.”
- “[T]he changes driving the increases in revenue and profit have drawn the ire of what Disney calls ‘legacy fans,’ or longtime parks loyalists.”
- Briefly explain what must be true of the demand for tickets to Disney’s theme parks if its revenue from ticket sales increased even though 17 percent fewer tickets were sold. [For the sake of simplicity, ignore any other sources of revenue Disney earns from its theme parks apart from ticket sales.]
- In Chapter 10, Section 10.3 the textbook discusses social influences on decision making, in particular, the business implications of fairness. Briefly discuss whether the analysis in that section is relevant as Disney determines the prices for tickets to its theme parks.
Solving the Problem
Step 1: Review the chapter material. This problem is about the effects of price increases on firms’ revenues and on whether firms should pay attention the possibility that consumers might be concerned about fairness when making their consumption decisions, so you may want to review Chapter 6, Section 6.3, “The Relationship between Price Elasticity of Demand and Total Revenue” and Chapter 10, Section 10.3, “Social Influences on Decision Making,” particularly the topic “Business Implications of Fairness.”
Step 2: Answer part a. by explaining what must be true of the demand for tickets to Disney’s theme parks if revenue from ticket sales increased even though Disney sold fewer tickets. Assuming that the demand curve for tickets to Disney’s theme parks is unchanged, a decline in the quantity of tickets sold will result in a move up along the demand curve for tickets, raising the price of tickets. Only if the demand curve for theme park tickets is price inelastic will the revenue Disney receives from ticket sales increase when the price of tickets increases. Revenue increases in this situation because with an inelastic demand curve, the percentage increase in price is greater than the percentage decrease in quantity demanded.
Step 3: Answer part b. by explaining whether the textbook’s discussion of the business implications of fairness is relevant as Disney as determines ticket prices. Section 10.3 may be relevant to Disney’s decisions because the section discusses that firms sometimes take consumer perceptions of fairness into account when deciding what prices to charge. Note that ordinarily economists assume that the utility consumers receive from a good or service depends only on the attributes of the good or service and is not affected by the price of the good or service. Of course, in making decisions on which goods and services to buy with their available income, consumers take price into account. But consumers take price into account by comparing the marginal utilities of products realtive to their prices, with the marginal utilities assumed not to be affected by the prices.
In other words, a consumer considering buying a ticket to Disney World will compare the marginal utility of visiting Disney World relative to the price of the ticket to the marginal utility of other goods and services relative to their prices. The consumer’s marginal utility from spending a day in Disney World will not be affected by whether he or she considers the price of the ticket to be unfairly high.
The textbook gives examples, though, of cases where a business may fail to charge the price that would maximize short-run profit because the business believes consumers would see the price as unfair, which might cause them to be unwilling to buy the product in the future. For instance, restaurants frequently don’t increase their prices during a particularly busy night, even though doing so would increase the profit they earn on that night. They are afraid that if they do so, some customers will consider the restaurants to have acted unfairly and will stop eating in the restaurants. Similarly, the National Football League doesn’t charge a price that would cause the quantity of Super Bowl tickets demanded to be equal to the fixed supply of seats available at the game because it believes that football fans would consider it unfair to do so.
The Wall Street Journal article quotes a Disney spokeswomen as saying that the company sets the price of tickets according to demand and supply. That statement seems to indicate that Disney is charging the price that will maximize the short-run profit the company earns from selling theme park tickets. But the article also indicates that many of Disney’s long-time ticket buyers are apparently upset at the higher prices Disney has been charging. If these buyers consider Disney’s prices to be unfair, they may in the future stop buying tickets.
In other words, it’s possible that Disney might find itself in a situation in which it has increased its profit in the short run at the expense of its profit in the long run. The managers at Disney might consider sacrificing some profit in the long run to increase profit in the short run an acceptable trade-off, particularly because it’s difficult for the company to know whether in fact many of its customers will in the future stop buying admission tickets because they believe current ticket prices to be unfairly high.
Sources: Robbie Whelan and Jacob Passy, “Disney’s New Pricing Magic: More Profit From Fewer Park Visitors,” Wall Street Journal, August 27, 2022.