Tuesday, June 29, 2010

The Economics of Annual Passports

A common theme on Disneyland message boards is that annual passholders are causing strange things to happen at the parks. True, they behave differently than day trippers and vacationers, and this can have adverse effects on the resort.

Passholders are more likely to drive alone to the park, overloading parking lots (which Disney did not adequately plan for). The parks are not necessarily more crowded, but the crowds are distributed differently. Today, Friday nights feel more crowded than Saturdays. Premieres and openings see massive crowds, sending Team Disney Anaheim running for ze hills. The day before summer blockout days begin are especially uncomfortable. Some long-time fans have pretty much thrown out all conventional wisdom about which days are best to visit.

I've noticed that annual passholders don't hit rides like other guests do, sometimes preferring to hang out, clogging walkways, tables and other areas. I remember Friday nights in 2007 in which the park was packed. It was difficult to move in most lands, yet Indiana Jones would have a 15 minute wait. Space Mountain would post a 30 minute wait. Very strange behavior, indeed.

Of course, there's nothing inherently wrong with an annual passholder program. I had one for a couple of years and you probably the same. Season passes are standard features at amusement parks across the country. While most people are content to visit once or twice a year, a theme park operator also has a subset of their customer base that enjoys visiting more often than the average person. They pay a lump sum for nearly unfettered access so that the marginal cost of subsequent visits is relatively low. This is all fine and well, of course, but can there be too much of a good thing?

Consider the ways in which an inexpensive annual passholder program can create perverse incentives to visit the park. Once you get past that initial lump sum cost, the marginal cost of visiting the park is relatively low. The price of your admission (and parking if you added it on) is a sunk cost, one that you don't consider anymore. The marginal cost of visiting the park now consists of transportation costs and time. This has a tendency to cause annual passholders to overuse the park because they don't consider the full cost of their visit anymore. 

Driving works in a similar way. For the typical car owner, it costs about 50 cents per mile to operate their vehicle. Most of this cost consists of the initial capital outlay for the vehicle and depreciation. The capital outlay is a sunk cost and depreciation isn't on the average driver's radar. 

When the car owner does decide to drive, they primarily consider the cost of fuel, which is significantly cheaper than 50 cents per mile, leading to overuse. Even the cost of fuel is in the background as you don't have to insert quarters into your dashboard to begin driving. This in turn leads to overburdened roads and highways, more air pollution and more accidents.

The concept is the same, an initial lump sum cost, followed by a relatively low marginal cost to actually use the product or service, causes overuse in some cases. This is all very much simplified, of course, but t
he key is finding an appropriate price point so that TDA doesn't find itself dealing with so many power users that the resort's infrastructure is overtaxed. Society is also interested in maximizing utility. Who gains a greater benefit from a visit to Disneyland, a child on his or her first visit or an annual passholder's hundredth visit this year?

While we'll probably never see the A-B-C-D-E ticket books return, Disney may want to set that initial lump sum cost a little higher in order to limit the amount of super users.
Or perhaps they could build transportation systems, parking lots, attractions and shows that could actually handle all these people.

In any case, for as long as Disney continues to offer cheap passes, let the good times roll. Just don't complain that it takes a half an hour to board a tram.

1 comment:

Matthew said...

The AP's also promote a "locals only" mentality at DL, which I have seen evidenced more and more in the past few years. These people wear their AP's around their neck like a rent-a-cop wears his badge. They know the DL drill and are not shy about "correcting" those who fail to follow it to their satisfaction.