Question

A fan called a talk show and says, “In our large city, I have met many people who want to go see a baseball game, but say the ticket prices are too high. Yet, when I go to the stadium, the place looks half empty. I don’t know why the owner does not lower prices.” Using the concept of “maximizing economic profit,” explain why the owner may not want to fill the stadium.

Answer 1

While buyers would like to buy tickets at the lowest price possible, the seller would not be interested in doing so.

In a perfectly competitive market, P is set equal to MC, that is, price is set as per marginal cost of production.

However, a stadium is more like a monopoly, or oligopoly (as there won't be more than a few large stadiums in a city).

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Here, the sellers set quantity as per MR = MC (this is the profit maximization rule)

Consider the following example with hypothetical numbers:

First, the seller decides the quantity at which profit can be maximized.

This number may be just 40% of the stadium capacity.

At this quantity, they analyze demand to estimate what is the highest price people are willing to pay. Generally, this is much higher than just the marginal cost.

If the marginal cost of providing a ticket is $2, the seller will set the price much higher, at say $20 per ticket.

Although this means that 60% of the stadium may go empty, the seller still makes more money than by lowering the price and incurring the higher inconvenience of a full stadium.

From the seller's perspective, a full stadium is a headache. Managing thousands of people, who have purchased cheap tickets, and all their variable costs.

Since demand for baseball games is inelastic (people will pay even if prices are high), the seller doesn't lose out much on revenue.

Hence, economic profit is maximized by charging a much higher price than marginal cost, and allowing a large part of capacity to be unutilized. This actually lowers the variable costs, and is more convenient for the seller.