Hello everyone,

I was discussing this issue of whether to charge admissions fees or
not with a friend of mine who has an MBA, and he wrote down some
interesting thoughts.  He gave me permission to share with you all, so
I will paste them below.

All the best,

Travis

Begin quote:

Pricing is complex. In general any price that is above marginal cost
(the cost to make one more unit) is profitable.  However this model
breaks down in many circumstances, for example if you have a business
with very high fixed costs and very low marginal costs.  For example,
Airlines have high fixed costs, but the marginal cost of adding one
more passenger (if there is an extra seat), is a can of coke, bag of
peanuts and a tiny bit more fuel. So one might think that if airlines
are pricing rationally, the airlines would reduce the price of plane
tickets to 2 or 3 dollars right before takeoff as to fill all the
seats.  However, very cheep product does change consumer's perceptions
of the product and it will change the way people value the flying.
Museum admission seems like a similar scenario, the fixed costs are
very  high, but the marginal cost of letting one more person through
the door is very low.

I would imagine that there are several competing concerns when pricing
museum entrance. Off the top of my head.
1. Even if you don't need it, money is good.
2. People have an irrational tendency to value their purchases. This
is post-purchase rationalization,  see
http://en.wikipedia.org/wiki/List_of_cognitive_biases.
3. To maximize patron's enjoyment there is a non-zero optimal crowd
for the museum.  People probably do not want to be in an empty museum,
nor do they want heavy crowds.  Price can be used to control the
number of people inside.
4. A cover charge keeps out people who are interested in being
indoors, rather then interested in the exhibits.  (mall-walkers,
bathroom-users, bums, amorous young lovers, students looking for a
place to study).


In summary, it makes a lot of intuitive sense to me that a museum
would want to have a small admission fee for purposes other then
raising money.   And there is a plethora of evidence showing that
people rationalize their expenditures.  I recall reading how there is
a tendency for people who are somewhat neutral about a purchase before
they make it become very sure of the decision afterward.
Fundamentally, we all want to think that we are smart and make good
decisions, if we spent $2 at a museum, we want to think we got a good
deal.



-- 
==================================
Travis Nygard
[log in to unmask]
http://www.travisnygard.com
http://arthistorynewsletter.com/
==================================

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