Can stadium owners increase profits by imposing a price ceiling on their hot dog vendors?

How about these prices for food at NFL games: “$35 for a (large) cocktail? $19 for cheese curds? $18 for essentially a Doritos taco?”

Although it is tempting to blame stadium owners for the high prices and bad quality, the stadium owners don’t actually control the food prices at all. The standard industry practice is to outsource the concessions to a “concessionaire” corporation that specializes in selling food because concessions is a very different business than running a major-league sports franchise and outsourcing food to a specialized concessions company is more efficient because of their advanced concessions knowledge. Typically the stadium owner auctions out a contract to sell food and they create a food monopoly within the stadium because that maximizes the money that concessionaires will pay. Greg Beadles explains how it works. The concessionaires give this sort of offer:

…we’ll write you a check today for $20 million so you can buy all the equipment that you need to buy. We’ll give you 60 percent of the gross revenues – so before any expenses are paid – and then you’re just done… So for them to get their money back, there’s only, you know, two sides of the balloon left to squeeze. And it’s food quality: let’s buy the cheapest food that we can, and let’s charge as much as we can. And maybe, you know, a third is labor: let’s have as few people as possible to make all of this happen, which all of that translates into bad fan experience.

Atlanta Falcons decided to buck the trend and dramatically slash prices. To do that, they had to completely change the kind of contract that they used for concessionaires. Nick Fountain explains:

So the Falcons decided to take charge of concessions and get rid of the whole revenue-share thing. Instead, they’d pay a concessionaire a management fee, but they’d control everything – how many cooks there are, the quality of the food and, importantly, the prices.

The Falcons imposed price controls and kept the prices low. The NYT reports that it worked:

Despite a 50 percent decrease in prices for food and nonalcoholic drinks compared to prices in the Georgia Dome, the amount spent per fan increased by 16 percent…

They reduced prices by half and total revenues increased by 16% which means that fans were buying more than twice as much food and drink. Despite this apparent success, concessions profits undoubtedly dropped because selling more than twice as many drinks and sandwiches means that variable costs more than doubled too and that would outweigh a measly 16% increase in total revenues. But the Falcons aren’t interested in maximizing profits on concessions; they want to maximize overall profits and that undoubtedly means NOT maximizing concessions profits.

That is because the teams make a lot more money from tickets than from concessions and if the overall stadium experience is more pleasant, they will sell more tickets. Tickets and concessions are complementary goods and whenever a company sells two complementary goods, it should think about a loss-leader strategy. That means losing some profits on one item in order to gain more profit on the other item. Sometimes it even maximizes profits to reduce prices on both items because that can sell more of both. This is a common bundle pricing strategy.

Bad, overpriced food makes the stadium experience unpleasant because fans avoid the food and let their empty bellies grumble during the games. That hurts ticket sales. Who wants to go to a stadium for four hours and have to starve because of running out of food money? And fans feel gouged because they already have clear information about what they feel is the right price of food because they see the same kinds of food everyday for less than half the price. In fact, they are reminded of the unfairness of the food prices just before and after every game because they can buy exactly the same foods just outside the stadium too. In contrast, the ticket price is purely subjective and cannot be compared with an exact replica anywhere else. High ticket prices only reinforce the feeling that the game itself is valuable and conveys status.

Creating a concessions monopoly gives the Falcons more control over the profits and lower transactions (negotiations) costs than they would have with multiple concessionaires. But auctioning the concessions monopoly to the highest bidder created perverse incentives. Imposing price controls over concessions helps boost overall profits by boosting demand for tickets and the Falcons not only raised ticket prices, but they sold so many tickets, they stopped selling single-game tickets except for standing room. In order to get a seat, you have to buy a season ticket. That means they have developed a core group of loyal fans who come to games rather than just getting curious spectators who want to try taking the kids to a game once.

TV is where the real money is and seats full of loyal fans make for better television because they look more animated when the cameras sweep through the stands between plays and they look better from the distance as a sea of team colors.  The NYT reports that, “about 70 percent of revenue for N.F.L. teams comes from league wide television, sponsorship and merchandise contracts.” Forbes reported in 2018 that the Falcons got total revenues of $451 million and so by comparison a one-time $20 million concessions contract is, well, peanuts. Even if they lost a few million dollars on concessions by cutting prices in half, they could easily make that up in ticket sales which totaled $74 million. And if happier fans in the stadium could cause a small increase in TV viewers, sponsorships, and merchandise sales, that would easily make up for the loss in concessions profits. The NYT suggest that the strategy is working:

According to surveys of fans by the N.F.L., Mercedes-Benz Stadium ranked No. 1 in terms of quality, value, speed of service and variety. The number of fans who arrived earlier before games increased by 10 percent as well, indicating that dining options inside the stadium were better than those in the surrounding area.

For the concessionaire, soaking the fans is the rational, profit-maximizing strategy, but that essentially steals profits from the stadium owner that are bigger than what the concessionaire stands to gain by soaking the fans.

For another way of looking at this issue, here is a video tutorial on what is sometimes called the double marginalization problem. It is another way of thinking about the pricing of complementary goods and it demonstrates that when people within a supply-chain compete to maximize their portion of the profits they reduce total profits.

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Posted in Managerial Micro

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