Charge Now-Here's How

By Sharon Oster

This article was published in Museum News, November/December issue of 2007.

For most museum directors, charging admission is one of the unfortunate necessities of running a financially viable museum. Indeed, it is not uncommon to hear museum directors suggest that, in an ideal world, all museums would be free all the time. For many public museums, state funding allows such a policy.

I would like to provide a contrarian view—something that economists do increasingly these days. I want to suggest that admission fees are underappreciated by some nonprofit managers and, indeed, that in some instances museums should charge admission even if they do not really need the revenue.

Museums are in many ways the masters of what some call price discrimination, or “value-of-service pricing.” By this I mean that museums charge different people different prices at different times to buy their “product,” a museum visit. One of the reasons museums—like many other nonprofits—are able to charge different prices to different consumers is that they are selling a nontransferable service rather than a more easily exchanged commodity. In economics, we argue that this nontransferability of the service prevents the exercise of arbitrage that we see in other markets. For example, it is hard for General Foods to sell its cornflakes to two different consumers in the same store at two different prices; the person offered the lower price would simply buy two boxes and resell one to the other customer. But a museum can easily charge a senior citizen one price for a museum visit while charging full price to others; the visit is not transferable and so arbitrage is not viable. Value-of-service pricing is not only possible, in most cases it is a highly profitable strategy. To the extent that a museum has patrons with widely differing willingness to pay and can identify those consumers, it will gain substantially from a multiple-price strategy. Value-of-service pricing allows a museum to charge a high price to one patron without losing the attendance of others who can be charged a lower price.

We see many applications of this value-of-service pricing in addition to the obvious examples of discounts for seniors and students, and many of them deliver benefits other than just increased revenue. Almost all museums offer free days (or evenings) while charging admission on other days. Free days will often attract patrons with less disposable income and thus often lower willingness to pay, who are willing to give up scheduling flexibility for the saved admission fee. The offer of free days is often designed with the museum’s mission in mind: Most museum directors are interested in exposing as broad an audience as possible to what the institution offers, and free days in theory open the experience up to more diverse audiences. But from a museum management perspective, the juxtaposition of free days with for-pay days also accomplishes something else: It helps shift some patrons from one day of the week or time of day to another. It is not surprising that free days are typically lower-volume weekdays because one business function of the free-day offer is to encourage people to shift their visit to the lower-demand day. By offering only some days free of charge, a museum can better manage its flow of visitors over the week. People who are flexible and price-sensitive will visit the Museum of Modern Art in New York on Friday evenings when admission is free, rather than on Saturdays when the price is $20.

Now consider the benefits of this policy from the perspective of economics. The net effect of the shifting of audience will be a reduction in congestion on Saturday, since arguably at least some of the Friday evening visitors might have attended on Saturday. This reduction in congestion in turn improves the quality of visits for those people who still choose to come on Saturday. In the language of economists, coupling free days with costly days helps to reduce congestion externalities. Again, what is key here is that the policy of the two prices benefits both the day-shifters and the stuck-on-Saturday visitors. Everyday free admission cannot accomplish this feat.

But value-of-service pricing by museums goes further. Most museums also offer relatively low-cost membership packages, providing unlimited visits for a fixed annual fee. Under this option, of course, the price you are implicitly paying for a visit varies by how often you come. The more you come, the cheaper it is per visit. Considered another way, once I buy the membership, the marginal cost of my attendance is zero.

Many museums originally thought about these memberships as a tool of donor relations, but this pricing strategy has another felicitous feature. It is a way of making the museum relatively cheap for the hometown audience, which because of its proximity will find the fixed fee attractive, while remaining relatively high-priced for the out-of-town tourist. But of course this latter group is typically not very price-sensitive. Few people who visit Paris from New York turn away at the door of the Louvre because the admission fee is too high. Implementing membership fees allows a museum to extract revenue efficiently without reducing patronage. It also results in more visits by the hometown member who, as I indicated earlier, sees the marginal price of a visit as zero. I might also note that the right membership fee, if we think this way, depends on both the per-visit price and how often we think the high-frequency people are likely to visit.

Recently, economics has begun bringing into the discipline more work on human psychology. This new field of behavioral economics also has something to say to us about the possible benefits of charging prices in the museum setting. The value of many kinds of goods and services depends not only on the object purchased but on the effort brought to bear on the patron’s consumption activity. A child’s learning depends not only on the objective quality of the teacher but on the effort the child brings to the process. One’s appreciation of a book depends on one’s own concentration and background, not only the author’s prose. To really reap the benefits of a museum visit requires not only great art but a serious and attentive visitor; in some ways the visitor needs to “invest” in the visit in terms of his or her own attention.

How do we encourage consumers to invest in their consumption? There is some evidence developed in economics suggesting that, at least in some settings, charging a price encourages people to make these kinds of investments. Nava Ashraf, James Berry and Jesse M. Shapiro, looking at the case of Zambian villagers for a National Bureau of Economic Research article, found that selling water treatment tablets, at very modest fees, resulted in more extensive use of those tablets to purify water than came from giving tablets away. In the current context, I would argue that charging a price to visit a museum may not only attract more devoted patrons but actually induce other patrons to take the visit more seriously to psychologically justify the admission price. If the museum then takes the revenue raised from the fee and uses it to produce education-enhancing complements to the visit, such as free audio guides, this investment effect will be further magnified.

It is also worth noting that charging to see art and artifacts is nothing new. In the Museum of Modern Art exhibition on Manet’s The Execution of Emperor Maximilian, there is a large poster publicizing the first time Manet’s famous work was exhibited in the U.S. in 1879. The exhibit took place in a hall in Boston, and the price to see the single work was 25 cents. In 2006 dollars, the equivalent admission fee would be about $5 for the one painting. By this standard, most of the current museum admission fees look like a bargain.

Sharon Oster is Frederic D. Wolfe Professor of Management and Entrepreneurship and director of the Program on Social Enterprise, Yale School of Management.

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