What Happens When Prices Plummet?

Prince is on a tear.

He’s dropped his lawsuit against about 20 of his fans who he accused of selling bootlegged recordings, and now he’s talking about doing shows for $10 a ticket.

He’s still a major draw, though it would appear his hit-making days are behind him. He’s richer than astronauts and first-name famous. Not only that, but he’s got artistic and popular cred in abundance.

That means Prince does whatever he does because he feels like it, because it meets some inner need or just because he wants to.

So a $10 ticket for Prince means a huge consumer surplus, a really great deal. But as with any really great deal that is in finite supply, it has a side effect: shortages.

When prices go way below their natural market price (in other words, the place where the market would balance supply and demand), you’re going to get a lot of people who cannot buy the product, even though they would buy it at the price offered.

Is this good? It can be if you’re trying to create pent-up demand or trying to get people to buy a substitute product, like a recording. In fact, in the old days the whole concert business was essentially a tool for creating demand for records, tapes and CDs.

If you’re in the live entertainment business though, and you don’t have some other way of making money from frustrated demand, this is not exactly a brilliant strategy. You might stoke a little desire based on lack of availability, but if you don’t satisfy it pretty quickly, it cools.

What that means for you, because you probably aren’t in Prince’s situation, is that you have to keep working hard to find the right price, where it’s a good value to the consumer, but not overpriced; where you’re not driving people away because of the price and you’re not creating a legion of people who would but can’t buy your tickets because they’re so cheap that they disappear instantly.

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