Merlin Entertainments PLC is one of the largest operator of visitor attractions in the world and owns over a third of the most popular theme parks in Europe. It runs the four most visited parks in England – Alton Towers, Legoland Windsor, Thorpe Park and Chessington World of Adventures as well as the most popular theme park in Italy – Gardaland. Alton Towers alone had 2.5 million visitors in 2013. Anybody thinking of going to one of these attractions is faced with a wide range of different entry fees .
Theme parks and tourist attractions have market power so their owners have to make some interesting pricing decisions. They have to tackle the same dilemma that confronts any seller that faces a downward sloping demand curve for its goods/services.
One option for the firm would be to increase the entry fee. This would produce higher profits per visitor as some of the surplus from the transaction previously enjoyed by the consumer will be extracted by the seller and converted into producer surplus. Unfortunately for the business the higher price, all other things equal, will also result in fewer visitors. Some people will be deterred from visiting because of the higher price and the seller will lose out on potential revenue.
An alternative strategy would be for the theme park to reduce its entry fee. All other things equal, this will increase the number of visitors. However, it would also mean that the profit per customer would fall. The frustrating issue for the seller is that some of its customers, who would still have visited the attraction at the higher price, are now able to get a better deal.
This dilemma exists if the seller has to charge all of its different customers the same entry fee. If it could charge a higher entry fee to those customers who would be willing to pay more and a lower entry fee to those who would be willing to pay less then it could make more money. Extra revenue could be obtained from those additional sales that take place at the lower price while more consumer surplus could be extracted from those still paying the higher price.
Is it possible for a firm to charge different prices to different customers for the same or a similar good or service? Table 1 below shows the entry fees for Warwick Castle, another tourist attraction owned by Merlin Entertainments PLC.
It can immediately be seen from this table that some groups of customers pay a different entry fee from others. For example adults have to pay £24 to enter on the day while people aged 60 and over pay a lower price £16.80. The entry fee for children aged between 4 and 11 is £21.00 while those aged 3 and under go for free. Students aged 16-18 can gain entry for a price of £13.50 if they can provide valid ID and purchase the tickets from the visitbritainshop website.
In this example, the company has allocated people into different categories by age (i.e. senior, adult, student, older children and younger children) and has set the entry fee that customers in each group have to pay.
The table also shows that if customers purchase on- line then they can get the tickets more cheaply. The entry fee for each category is 25% lower if the ticket is booked seven days in advance i.e. the prices shown in the last column in the table. If the booking is made between 2-6 days in advance then the discount is only 10% i.e. an adult ticket would cost £21.60. The on-line discounts are open to everyone. People are given the choice to either book on-line in advance or pay on the day. This is different from a situation where you are placed into a category by the firm. For example the customer cannot choose whether they are over 60!
If people are prepared to spend more time searching on the internet then other cheaper prices can also be obtained. Once again these offers are open to anyone willing to spend the time and effort in order to find them.
All the ticket prices above give people access to exactly the same attractions on the day. They do not give the visitor access to two of the attractions at the castle – the Dragon Tower and Castle Dungeon. Entry to the Dragon Tower would cost an adult on the day an extra £1.80 while entry to the Castle Dungeon would cost an extra £5.40.
Warwick Castle Ticket Prices Warwick Castle (accessed on 04/09/14)
Alton Towers Alton Towers (accessed on 08/09/14)
Warwick Castle Tickets visitbritainshop (accessed on 02/09/14)
Global Attractions Attendance Report teaconnect (accessed on 05/09/14)
Merlin Entertainments Merlin Entertainments (accessed on 08/09/14)
Questions
- What pricing decisions do firms have to make if they operate in a perfectly competitive market?
- Explain why an individual tourist attraction will have a downward sloping demand curve
- Paying an entry fee and an extra payment per attraction is known as what type of pricing? What advantages does this type of price strategy have for the seller?
- How would you calculate the profit per customer? What factors other than the entrance fee would determine the profit made per customer in a theme park or tourist attractions?
- Paying a different price depending on which category you have been assigned to by the seller is known as what type of pricing strategy? Can this type of pricing strategy ever be in the interests of society?
- In the example used in the case, customers are assigned to different categories by age. Can you think of any other ways that firms could categorise their customers?
- Given the category customers have been assigned to they can pay different prices depending on whether they buy the tickets on line. What is the price strategy called when customers can choose from a variety of pricing options for the same or similar product? Can you think of any different methods that could be used by the seller to carry out this type of pricing strategy?