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The Use of the Two-Part Tariff in College Ticket Pricing

2010 June 17
by Phil Miller

I’ve written before that when you look at how college athletic department officials make business decisions, they act a lot like their professional counterparts even though the athletic departments are legally non-profit organizations.  But being non-profit in a legal sense doesn’t mean that you, as a decision-maker, can’t have maximum net revenue as an objective.  It just restricts how you can distribute the excess revenue.

Daniel Hamermesh has a post at the Freakonomics blog on college ticket pricing that I paste in its entirety below.

Charles Clotfelter of Duke University has a book coming out soon, calledBig-Time Sports in American Universities.  He offers examples of a number of schools that have great teams in one major sport (for example, football), and mediocre teams in another (say, basketball).  For their mediocre team, the arena is often half-empty, even though the ticket price is quite reasonable.  There is excess supply. For the powerhouse team, the ticket price is also reasonable—but at that price there is a huge excess demand for seats.

How to remove the shortage and equilibrate the market?  Simple: at one school, the price of a pair of season tickets is $1,000; to be eligible to pay this amount, one must make an annual “charitable gift” of $7,000 to the university.  Presumably this contribution is sufficient to equilibrate supply and demand. I find this quite disgusting—but I suppose it is more desirable for the university to earn the revenue than to have speculators profit by purchasing the tickets and then re-selling them at the market price, although I would bet that some season ticket-holders do scalp tickets on games that they can’t attend for personal reasons.

What he’s referring to is the two-part tariff that is so common in business these days.  With a two-part tariff, a person pays a flat fee to essentially get the right to buy a product and then has to pay again buy the product.  It’s away to obtain higher profits.  Sam’s Club uses a two part tariffs and so do professional sports team (only there they are called “personal seat licenses”.  These donations Hamermesh writes about are no different, except for the fact that what you are buying is not just the right to buy tickets to one sport, but multiple sports.

When I was a student at Mizzou in the 90′s, the athletic department sold what was called an “All Sports Pass.”   The All Sports Pass cost somewhere between $200 and $250 and gave students access to all sporting events except for men’s basketball*, which was the premier sport at Mizzou back then.  For men’s basketball, the pass put you into a lottery for reserved seating.  If you chose not to particiate in the lottery, then you got nose-bleed section GA seats.  If you participated in the lottery, you’d get, depending on your lottery number, your choice of seats with more desirable seats being more expensive, just like in the pros.

Any student who didn’t buy the pass would have to pay the usual student admission price to get into any sporting events, even the non-revenue sports.  But students with the passes got into the non-revenue sports’ games for no extra charge.  My sense was this was a way to maximize attendance, and thus profits, for the athletic department as a whole.

As far as Hamermesh’s comment that the practice of requiring donations being “disgusting”, I don’t share that feeling probably because I obtain greater satisfaction from sports than Hamermesh (although I don’t personally know Dan) and have willingly bought tickets to college sporting events for almost 20 years now.

Whatever our relative feelings are on sports, amateur status or not, college sporting events have a scarce number of tickets available and those tickets need to be rationed in some way, which Hamermesh seems to reluctantly admit.

9 Responses
  1. Dan permalink
    June 17, 2010

    If Congress ever proposed that sports revenue is unrelated business income to colleges we would see every highway, airport and train station into D.C. clogged with ADs, coaches and any university employee that draws a check from a sports department.

    Put them on the same level playing field as pro teams and then they can price their tickets anyway their hearts desire. That should satisfy everyone, right?

    Mizzou has the same system for student tickets. But starting last year you had to have a student id to sit in the student section at football games. How can I make sure my son drinks nothing stronger than soft drinks at the games when we parents can’t cram into the middle of all his frat brothers? Next thing you know there will be underage students drinking in their frat houses or at tailgate parties before the game.

  2. ConnGator permalink
    June 18, 2010

    One key item missing is the first “part” of the two-part tariff is considered an educational donation, and is thus tax-deductible and sometimes matchable by your employer.

  3. Greg Pinelli permalink
    June 19, 2010

    I’m having a hard time getting worked up over this “two part” system…So what? No one forces anyone at Tennessee or Missouri..or anywhere else to pay the up front entry fee. If it bothers some college professors then I have a piece of advice for them..look at that fee as a Title IX contribution. Title IX is a liberal’s version of strong arming college sport’s programs..someone has to pay..so why not the guy who owns the big Mercedes dealership in town who wants to feel important?

    Also…why would anyone think that the additional fee would prevent someone from reselling tickets at a profit? If you don’t have season ducats and want to see Florida v Tennessee or LSU you pay the going freight. That’s life at the NCAA elite level…where Coaches and ADs live very large and walk when it suits them..and players who sneak a few extra buck from alums are huge cheats!

  4. Dennis permalink
    June 21, 2010

    Two part tariffs, like any form of price discrimination, are possible because the seller of the product has some degree of market power. In other words, unlike under perfect competition where no firm (and no consumer) has the ability to affect price, the existence of market power generally means that the seller is a price setter. Price setting means that price is greater than marginal cost, and that means that resources are not allocated efficiently. So one objection to the two part tariff that has nothing to do with liberals or conservatives and everything to do with the best use of scarce resources is simply that the universities that engage in such behavior are implementing an inefficient use of resources. Economists as a lot generally are opposed to wasteful uses of resources.

    The use of the two part tariff by a public entity is also objectionable on the grounds that the public sector objective function and the private sector objective function perhaps ought to be different. The two part tariff transfers surplus from the purchaser to the seller. A private firm has the obvious and reasonable objective to maximize its profits, subject to the restrictions of the law, and so on. When person buys a PSL or a membership to Sam’s club, they do so voluntarily and the firm is doing what its shareholders expect, maximizing profits. When a person pays the mandatory fee for the right to purchase season tickets from a public university, then the government is extracting the maximum surplus possible from its citizens. It is not so clear that a public sector entity should be engaged in that type of activity.

  5. Millsy permalink
    June 21, 2010

    “Price setting means that price is greater than marginal cost, and that means that resources are not allocated efficiently. So one objection to the two part tariff that has nothing to do with liberals or conservatives and everything to do with the best use of scarce resources is simply that the universities that engage in such behavior are implementing an inefficient use of resources. Economists as a lot generally are opposed to wasteful uses of resources.”

    Dennis, I’m not sure I agree with this in the case of professional or college sports in all cases. This is especcially the case if a team is selling out…an economist should be indifferent to where the welfare goes, making the use of a price discrimination tool pretty ambiguous. The number of seats available are fixed, so the idea that the sports product is being produced inefficiently may not hold here if the cost of building more seats exceeds the price that could be charged for nosebleeds. And that’s leaving out the fact that season tickets for high-donating alumni are for ‘good’ seats–which are limited not by the university but by the nature of viewing a sporting event–could even be considered completely different products from someone buying season tickets (or single game tickets) in the nosebleed section.

    Whether or not these exogenous limits on supply would constitute an inefficiency in production is for someone who knows much more about economics than I do. Maybe it is the case, but I don’t think it’s any less efficient than providing those same seats at marginal cost, since the supply is still the same either way.

    As for the idea that university athletic departments are a public entity, that seems like a stretch whether or not they consider themselves ‘nonprofit’. The money spent goes directly back into the athletic department, and is redistributed about there, rather than being redistributed elsewhere.

    Perhaps the government should not be regressively rewarding donations to an athletic department through tax credits based on your tax rate. But I don’t think the ‘mandatory fee’ differs from the ‘voluntary fee’ at Sam’s club outside of the subsidy through the tax break. That aspect is certainly less efficient, but the fee is ‘voluntary’ in the same way for either purchase. There are also other leisure activities for that purchaser–the one that did not want to spend so much on Mizzou football–to spend their excess money on, just like there are other grocery stores they could go to besides Sam’s Club.

  6. Phil permalink
    June 21, 2010

    I’m not sure that Title IX deserves any blame. Since the short run costs of athletic departments are mostly fixed costs and assuming that, despite their non-profit-for-tax-purposes status, they are profit-seekers, they would try to generate as much revenue as possible to maximize profits (or minimize losses). In the absence of Title IX, colleges would probably still try to generate maximum revenue. What Title IX does under this view is dictate how revenue is spent, not how much is generated.

  7. Millsy permalink
    June 21, 2010

    I don’t think I was clear in my first paragraph above, and perhaps I am off base with the efficient allocation of football seats if we assume the marginal cost is simply $0. But I’m not sure the idea that the school allowing seats to go to the highest bidder(s) should necessarily be looked upon as a negative, given the donation amounts should allocate the best seats to those that value them the most, while those who can’t afford the seats can pay less than would otherwise be the competitive price for all seats that are of the same ilk (ie. not different products). Still relatively ambiguous, in my opinion.

    I do understand the difficulty approving of the tax deduction for donations, though…but that’s an extension of the strange structure of tax breaks with charitable donations to begin with.

  8. Dennis permalink
    June 22, 2010

    Millsy,

    My discussion was muddled. I meant only that two part tariffs, like all price setting behavior, run the risk of an inefficiently small supply of the product, so one should not generally dismiss the outcome as one made voluntarily. I should not have used the universities use of two part pricing as an example. I should have said, “So one objection to the two part tariff that has nothing to do with liberals or conservatives and everything to do with the best use of scarce resources is that when sellers engage in such behavior they are likely implementing an inefficient use of resources.”

    I am not sure how one can dispute that the University of Texas Longhorns or the University of Michigan Wolverines are a public entity. They certainly are in some fashion a department within a public university. I would not say the same of the Duke Blue Devils or the Notre Dame Fighting Irish. The latter may be not- for- profit but they are not part of the state government while the former surely are part of state government.

    I agree that the funds collected as the first part of the two part tariff fund the athletic department of the university. That is largely irrelevant to me. Consider the completely inelastic supply of seats that you mention. With a downward sloping demand curve there is some intersection that determines price per seat to fill the stadium. Any area under that demand curve but above that price that equates quantity demanded with the number of seats is consumer surplus. The first part of the two part tariff takes some of that consumer surplus from fans. In general, I object to an arm of the government extracting from me as much of the surplus as it can on those things it sells to me. In other words, if the government is a monopoly seller of some good or service, my preference is that it not exercise that monopoly power. For it to do so while at the same time it tries to regulate private firms that have such power to induce them to behave more nearly competitively strikes me as hypocritical and wrong.

    I am not aware of any compelling reason for government agencies to exercise monopoly power when charging the public for the goods and services they provide.

  9. Millsy permalink
    June 22, 2010

    Understandable, with respect to not wanting a public entity extracting surplus…and perhaps I’m just plain wrong about the public-ness (word?) of the athletic department.

    All I meant was the athletic departments seem to be run as their own entity, rather than part of the larger educational institution (though there are obvious overlaps). If there is a bad taste from the hypocritical use of monopoly power, then that too is understandable, especially if it results in empty seats.

    I share a distaste for the government involvement with respect to charitable deduction on football ticket donations, however, given that it would at the margin induce the highest earning people to get the seats for ‘cheaper’. By pushing the price through the ‘donation’ aspect, they’re essentially discounting the tickets through the deduction to anyone who itemizes their tax form (likely all of the people spending $8,000 on season tickets) and sticking it on the IRS’s tab.

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