Living Economics

Mickey Mouse Economics
Steven Lindsey
By spreading out large fixed cost over more customers, price discrimination directly increases Disney World's profit.

I recently took a trip to Disney World with my family. My father is in the Navy, and at the time Disney was giving special discounts to all active military and their families. All park passes and hotel rooms were offered at half price. We had been considering a four- or five-day vacation much closer to home, but because of these discounts, we were able to take my family of eight to Disney World for nine days. Souvenirs and concessions were not half price, though, and lunch ended up costing over fifty dollars every day. Overall, we had a very enjoyable trip, for about three-quarters of the normal cost.

Using those discounts was the only way that we, like many other military families, could afford to make the trip to Disney World. While we were there, I also noticed that they give discounts to children and senior citizens. By giving these discounts, they increase their customer base to include people who could not afford the normal admission price. Thus they use price discrimination to increase their total sales.

Increasing total sales would go directly to the bottom line of Disney World because of its high fixed cost. Almost all of the total cost of running an amusement park is fixed cost (the variable cost of each additional ticket is near zero.) The fixed cost is the money spent buying the roller coasters, hiring employees, and paying for the electricity to power the park. No matter how few tickets are purchased, every ride has to be operational and every show must go on. So, as each admission ticket is sold, the cost of running the park is spread over a larger number of customers, thus each ticket sold lowers the average cost per ticket, reaping increasing returns. With such economies of scale, it makes sense for Disney World to price discriminate for bigger total revenue.

Note:
  1. Steven Lindsey is an undergraduate at the University of Memphis.
  2. Steven Lindsey is an undergraduate at the University of Memphis.
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