Defending the Indefensible

Back in September, Churchill Downs announced that they were changing their process for allocating tickets to the general public for the Kentucky Derby. You can read the basics here. To summarize, all persons requesting Derby tickets will be charged a $100 deposit. Those getting them will have the deposit put towards the ticket purchase, those missing out will only get $50 back. $50 to get a whole lot of nothing, potentially. Understandably, a lot of outcry against this powlicy. No that the deadline to register for these tickets has passed, I still have yet to hear the least bit of positive reaction to CD’s decision. I wonder how it worked out.

I’ll be that positive reaction. I work in pricing, so I’m constantly looking at ways organizations use pricing mechanisms to match the demand for their product to its supply. I read the subtext of CD’s policy to be

“we have a tremendous amount of demand for our product, a truly iconic American sporting event. We want people of all stripes to be able to attend the Derby, so we’ve kept prices for these tickets artificially low. Our previous methodology of allocating these tickets has been costly and time-consuming, and we frequently see these tickets resold by brokers or others at much higher prices. This policy is our first attempt to restore order to this market.”

If CD gets 40K applications for 20K tickets – speculating on those numbers – their processing cost is on the 40K, and it’s not insignificant. If 15K+ are from ticket brokers who have learned how to game the system, then many applications are from scalpers and not from fans genuinely wanting to attend the Derby. My belief is that Churchill Downs does not expect to make (a lot of) money off this new system, but instead is using this uncertain price mechanism to discourage scalpers and brokers from submitting applications. In fact, I imagine their applications fall to close to their allotted supply of tickets, and if there is a significant miss this year, CD will simply tweak the fee to get closer to the market demand.

We may find that ticket sales have fallen short for the Derby in the spring, but CD will have no problem selling unsold tickets on a first-come first-serve basis. I think there will be very few stories of spurned Derby ticket applicants getting the $50 fee applied – the fee will scare many away, perhaps unnecessarily. Instead, we’ll be glad that we’re getting tickets directly from Churchill and not a 3rd-party. And I’m okay with that.