Dynamic Pricing and the Dual Entitlement Principle: When is Dynamic Pricing Price Gouging?

This article in the Kansas City Star discusses the Kansas City Royals’ dynamic pricing plans for the post-season.  The key excerpt from the article is…

“Diamond Box seats located behind the dugout on the lower level normally sell for $39 in the regular season. That price jumps to $155 for a wild-card game or the divisional series, $220 for the championship series and $275 for the World Series.

That represents increases of 297.4 percent, 464.1 percent and 605.1 percent. Seem high? Several professionals in the field say they are among the sharpest increases they’ve ever seen for any event.”

The obvious question is “are these prices really too high?”  The knee jerk response from dynamic pricing advocates is usually that the prices are fair since the prices are set by the market.  The concern I have with the idea of market prices being “fair,” is that fairness is subjective.  In other words, it is the consumer that gets to make the judgment as to whether a given practice or price is fair.

There is an academic theory that speaks to this issue of fairness. The theory of “dual entitlement” basically says that consumers evaluate prices with the belief that while the firm is entitled to a profit, the consumer is also entitled to a fair price.  In the case of increasing prices of post-season games, the dual entitlement principle suggests that while the team is entitled to some price increase, the consumers should not be exploited with exorbitant prices.

What is the downside to violating this principle?  The Royals should be concerned with whether these prices damage their stock of fan loyalty.  As a small market team, the Royals are likely to have more losing seasons in their future.  If they want fans to stand by the team during the tough times, it seems like extracting every last dollar during a rare playoff series might be a bad idea.

So when is dynamic pricing price gouging?   Whenever the fans think it is.