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Ron, the director at the Annenberg Theater, is planning his pricing strategy for a musical to be held in a 400-seat theater. He sets the full price at $120 and estimates demand at this price to be normally distributed with mean 300 and standard deviation of 100. Ron also decides to offer student-only advance sale tickets discounted 75% off the full price. Demand for the discounted student-only tickets is usually abundant and occurs well before full-price ticket sales.

Suppose Ron sets a 300-seat booking limit for the student-only tickets. What is the number of full-price tickets that Ron expects to sell?

Compute the Expected Total Revenue for Ron considering the arrangement in part a.

Based on a review of the show in another city, Ron updates his demand forecast for full-price tickets to be normal with mean of 200 and standard deviation of 50, but he does not change the ticket prices. What is the optimal protection level for full-price seats?

Paper For Above instruction

The scenario outlined involves strategic ticket sales planning in the presence of uncertain demand. Ron’s approach involves using statistical methods and revenue management principles to optimize sales and revenue outcomes for a theatrical performance. The problem incorporates normal demand distributions, booking limit controls, and revenue calculations, requiring detailed numerical analysis and application of quantitative formulas, ideally implemented in an Excel model for precise results.

Introduction

Effective revenue management in the entertainment industry hinges heavily on understanding demand variability and strategically controlling inventory, in this case, tickets. The use of probabilistic demand models allows theatre managers to determine optimal booking limits, maximize expected revenues, and allocate inventory efficiently. This paper elucidates the step-by-step numerical analysis of Ron’s scenario under two separate demand forecasts, employing statistical and revenue management formulas. The analysis integrates the normal distribution properties, critical ratio calculations, and protection levels to guide optimal capacity allocation.

Part A: Expected Full-Price Ticket Sales Given Student Booking Limit

For the initial situation, demand at full price follows a normal distribution with a mean of 300 and a standard deviation of 100. The theatre imposes a 300-seat limit on discounted student tickets, which are sold in advance and are assumed to be fully sold whenever demand exceeds this limit. The goal is to determine the expected number of full-price tickets sold based on this setup.

Step 1: Demand Distribution and Student Ticket Limit

Demand for full-price tickets, D, follows: D ~ N(300, 100^2). The student demand is considered abundant, with a booking limit of 300 seats. The number of seats allocated to full-price sales is, therefore, the remaining capacity after the student demand is realized but capped at the maximum theater capacity of 400 seats.

Step 2: Demand for Student Tickets

Since demand for student tickets is abundant, and the booking limit is set at 300, the expected student demand, S, is considered to be at least 300, effectively absorbing all student requests up to that limit. Therefore, the number of seats unclaimed due to student bookings is:

Unclaimed student demand = min(DStudent demand, 300), but since demand is abundant, it is assumed to be 300.

Step 3: Expected Full-Price Ticket Sales

The expected number of full-price tickets sold, E[F], is calculated by subtracting the realized demand for student tickets from the total capacity, subject to constraints. Since demand for full-price tickets is stochastic, the expected full-price sales incorporate the demand distribution and the booking limit:

Expected full-price sales = E[min(D, 400 - S)] where S is the student demand (assumed to be 300). Given the abundant demand,

Expected total sales = min(D, 400 - 300) = min(D, 100).

Because D ~ N(300, 100^2), but actual demand can only influence full-price sales within the available 100 seats.

Step 4: Numerical Calculation

Calculating E[min(D, 100)] involves integrating the demand over the normal distribution:

Expected sales = ∫_{0}^{∞} min(d, 100) f_D(d) dd

which simplifies to:

Expected sales = 100 * P(D > 100) + ∫_{0}^{100} d f_D(d) dd

Using the properties of the normal distribution:

• P(D > 100) = 1 - Φ((100 - 300)/100) = 1 - Φ(-2) ≈ 1 - 0.0228 ≈ 0.9772
• The expected value over the truncated demand up to 100 can be computed using the standard normal PDF/ CDF.

Alternatively, performing this calculation in Excel involves defining the demand distribution parameters and using NORM.DIST and NORM.S.DIST functions for cumulative probabilities and expected values.

Part B: Expected Total Revenue

The total expected revenue, R, is the sum of revenues from full-price and discounted tickets. The assumptions are:

• Full-price ticket price: $120
• Student discounted price: 75% off, i.e., $30
• Capacity: 400 seats

Expected revenue from full-price tickets:

= $120 * E[F]

Expected revenue from student tickets:

Since demand is abundant for students, and the booking limit is 300, student tickets sell at the discounted rate, capturing demand up to 300 seats. The expected student demand is considered 300, so revenue from students:

= $30 * 300 = $9,000

Remaining seats for full-price tickets are at most 100, with expected full-price sales calculated as above. Total expected revenue:

Total Revenue = Revenue from full-price + revenue from students = $120 * E[F] + $9,000

Part C: Updated Demand Forecast and Protection Level

After the review, the demand forecast for full-price tickets has changed to a normal distribution with mean 200 and standard deviation 50, with prices unchanged. The question asks for the optimal protection level for full-price seats, which refers to the number of seats to reserve for uncertain demand.

Step 1: Critical Ratio Calculation

The critical ratio (CR) guides the protection level in revenue management. It is calculated as:

CR = (price - marginal cost) / price

Assuming marginal cost is zero (since tickets are perishable), CR simplifies to:

CR = 1 - (cost per seat / price per seat) = 1, but to refine, often a different approach is used:

Protection level, y*, is determined by demand distribution and the critical ratio, using:

P(Demand ≥ y*) = CR

Step 2: Determining the Protection Level y*

Calculate the z-score corresponding to CR = (full-price ticket's critical ratio):

z* = Φ^{-1}(CR)

Using the updated demand distribution D ~ N(200, 50^2), the protection level y* is:

y = mean + z standard deviation = 200 + z * 50

This indicates the number of seats to reserve for full-price demand to maximize expected revenue, considering demand variability and revenue trade-offs.

Conclusion

This comprehensive numerical analysis highlights the importance of demand distribution parameters, booking limits, and protection levels in revenue maximization. Implementing these formulas in Excel—using functions such as NORM.DIST, NORM.S.DIST, and inverse standard normal calculations—enables precise optimization of ticket allocation strategies. The results affirm that strategic limits and protection levels, tailored to demand forecasts, are vital for maximizing revenue in high-uncertainty environments like the theatre industry.

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