Consumer Options: Theory and an Empirical Application to a Sports Market

Abstract

The authors introduce the concept of consumer options and empirically validate it in the context of event ticket pricing. They demonstrate that consumer options can protect consumers from the downside related to uncertain outcomes and enhance seller profits by enabling superior market segmentation and increasing consumer willingness to pay. The authors examine the newly proposed ticket pricing mechanism in sports markets, in which there is uncertainty about the teams that will play in a final event (e.g., the National Collegiate Athletic Association Final Four basketball tournament). Fans who want to attend the game after knowing which teams will play are often disappointed because tickets typically sell out in advance. The authors propose that a fan can buy an option on a ticket before this uncertainty is resolved. Later, he or she can decide whether to exercise the option. The authors present a simple analytical model of consumer options in this setting. Then, they empirically demonstrate that profits under option pricing can exceed those from (1) advance selling and (2) pricing after uncertainty is resolved. The analysis and findings of this article lay a foundation for future work on consumer options in marketing.