Winning seats: Contingency selling in markets with limited capacity and diverse preferences

Abstract

This paper examines an emerging pricing model, contingency selling, for markets where the product is sold in advance with attribute uncertainty and capacity constraint. A typical example is tournament ticket sales for sports events where it is uncertain whether a particular team will appear in the game. The model enables the firm to sell tickets in a contingent fashion, i.e., some tickets will be valid only if a certain team gets into the game. When consumers (fans) have sufficiently different preferences for different products (games with different teams), selling these “contingent tickets” better matches the price with the willingness-to-pay of particular consumer segments (fans of specific teams). Exploiting state-based price discrimination and belief heterogeneity, contingent tickets generate a higher margin per seat than the traditional way of selling general tickets, especially when there are supply constraints. We further show that contingency selling continues to be advantageous in the presence of secondary markets where consumers purchase tickets in advance but can trade tickets once they know which team will be in the game. We extend our model to examine the impacts of consumer optimism bias and fan base asymmetry. Finally, we compare contingency selling with alternative selling mechanisms to demonstrate the robustness of our results and illustrate the situations where this new selling model is more (or less) advantageous.