Two-Part Tariffs and Disneyland

Interesting questions often precipitate (good) academic research. A great question is “why does Disneyland not make you pay for each ride”. This is the setup for Walter Oi’s examination of pricing back in 1971. Oi asks “If you were the owner of Disneyland, should you charge high lump sum admission fees and give the rides away, or should you let people into the amusement park for nothing and stick them with high monopolistic prices for the rides?” (Oi, 1971, page 76)

The exciting hook allows Oi to consider the effective use of two-part tariffs — which here is an entry fee and price per ride — by monopolists. (Disneyland being a monopolist in this illustration—Disney are the only ones offering Disneyland). What follows is an examination of what conditions make various pricing schemes ideal (for the monopolist). In this literature being discriminatory means charging different people different prices, not discriminating on race etc.., and it is typically good for profits if you can get away with it. In general, Oi finds that “A discriminatory two-part tariff, in which [ride] price is equated to marginal cost [what it costs to run a ride for the next rider] and all the consumer surplus is appropriated by lump sum taxes [entry fee], is the best of all strategies for a profit-maximizing monopoly.” (Oi, 1971, page 93).

The paper is interesting from a theory perspective and does have a real-world tie in to IBM’s old pricing scheme. That said, it doesn’t do a great job of explaining Disney’s choice to have a single admission fee. A two-part tariff as the theory recommends “is rarely observed” (Oi, 1971, page 93). Disney certainly don’t do this type of two part pricing. He gives some explanations, the possibility of resale (not a big problem for Disney), high transaction costs, or freight expenses. Transaction costs, the hassle of charging for each ride would have been considerable before smartphones or even magic bands. Still Disney could probably logistically relatively smoothly now do a two-part tariff but still don’t. I’m sure the explanation has a psychological element but Oi doesn’t go there.

Read: Walter Oi (1971) Disneyland Dilemma: Two Part Tariffs for a Mickey Mouse Economy, Quarterly Journal of Economics, 85 (1) pages 77-96