Monday, February 14, 2011

The Economics and Logic of Ticket Scalping

The economics of "ticket re-selling" aka "ticket scalping" is really pretty simple.  In general, there can only be a secondary market for tickets selling above face value if the following condition exists:

The quantity of tickets demanded by fans has to be greater than the quantity of tickets supplied by the band, promoter, arena, stadium, etc., which results in a sold-out show and a secondary market for tickets selling above face value.  Obviously, without that condition, the show is not sold out, and you can buy tickets at the box office on the night of the performance at face value.

Alternative ways to describe that condition are: a) an excess demand for tickets at face value, b) the number of tickets is being under-supplied relative to fan demand at face value, and c) the face value of the tickets is below the true market value of the tickets based on actual fan demand.  

That helps explain why we don't see "ticket scalping" for movie tickets - the number of movie tickets supplied to the market is adjusted based on consumer demand.  For popular movies, the number of movie tickets available is increased to meet demand, by showing the movie in more theaters, and showing the movie on multiple screens in individual theaters.  The length of time the movie remains in theaters is also increased for popular movies to increase the number of tickets available, and the ticket prices for popular new releases are also increased slightly by not allowing discounts or matinee pricing.       

For music concerts, if the goal is to eliminate ticket scalping, the solutions are easy: a) increase ticket prices to reduce the number of tickets demanded, and/or b) increase the number of tickets available, either by moving the show to a larger venue or by increasing the number of shows in a given location.   In other words, the band and/or promoter can simply increase the number of tickets supplied to meet the number of tickets demanded by the fans, especially if they are unwilling to raise ticket prices.  And since the number of tickets supplied is under direct control of the band and its promoter(s), there should be absolutely no excuse for any band or performer ever complaining about "ticket scalping."  For bands to complain about ticket scalping is really to acknowledge the band's faulty under-estimation of fan demand, and the blame should therefore be directed at the band for under-supplying tickets to its performances, not towards the greed of secondary ticket brokers. 

With that background in mind, consider what happened recently when the band LCD Soundsystem decided to retire and announced it would perform one last show for their fans at Madison Square Garden on April 2.  The band grossly under-estimated fan demand and therefore grossly under-supplied tickets - the show sold out as soon as tickets went on sale - which then created an active secondary market for the "ticket brokers," affectionately known as "ticket scalpers" (in a voluntary transaction for concert tickets, who's getting "scalped"?).  

So what did the band do?  They first got really mad at the ticket brokers (see the rambling, all-lower-case response on the band's website "fuck you, scalpers.") and then called their lawyer about the ticket scalping who told them “it’s legal." According to the band member james who wrote the letter on the band's website, "no joke. it’s fucking legal. i tramped around with friends and band getting insane. i wanted to buy some expensive tickets and then track the seller down to BEAT him. i acted stupid. i did some classic, shakespearean vain “fist shaking”, etc. i made angry tweets."

And then the band "found economic logic" and did what any rational movie theater owner does on a regular basis: The band added four shows at Terminal 5 in NYC from March 28-31, right before their farewell performance at MSG.  So the band will make more money, they will be better able to accommodate the demand of their fans, and in the process they will probably reduce the market for "ticket scalping." But they really still don't understand ECN 101, since the band's response concludes with:

"oh—and a small thing to scalpers: “it’s legal” is what people say when they don’t have ethics. the law is there to set the LIMIT of what is PUNISHABLE (aka where the state needs to intervene) but we are supposed to have ethics, and that should be the primary guiding force in our actions, you fucking fuck.  and to everyone else: thank you. you rule. don’t let the shitbags win."

HT: Armin Ghazi

26 Comments:

At 2/14/2011 9:45 PM, Blogger Prof J said...

Ya know, if the band I wanted to see started ranting like this, I'd sell my tickets to the show.

 
At 2/14/2011 10:14 PM, Blogger EG said...

I think you are missing a major point to this concern that many musicians are making here (and I am not in anyway a musician). The major issue is that if you ever try to go and get a ticket to a major show like the LCD show you have a hard time getting into the ticket seller sites because of the tribulations you need to make to get the tickets. The scalping companies have computer programs that allow them to enter this marketplace at much higher speeds and therefore eat up supply. The people buying tickets should be the fans and now they are forced out of the market because sites like Livenation and Ticketmaster (monopoly - another story for another time) dont have control over these computer programs.

http://www.nytimes.com/2010/06/06/weekinreview/06sisario.html

http://www.ticketmastersoftware.blogspot.com/

So the problem here is not economic as much as it is technological.

I as a huge fan of the band LCD soundsystem and I understand their frustration, but this problem is bigger than them. Adding shows helps but defeats their original purpose of a final show. They could name a hundred shows and sell them all out - but only if the price is right.

 
At 2/14/2011 10:35 PM, Blogger ACG said...

EG:

You're missing the same basic economic principle that the band missed. If they (or their managers/promoters) had bothered to price the tickets properly, there would be no secondary market and thus no scalpers clogging up the system. Tickets would be properly allocated to those who actually plan on attending the concert, and everyone wins.

 
At 2/15/2011 12:06 AM, OpenID Sprewell said...

This is really a classic example of the economic ignorance of most concert-goers. Rather than playing to that ignorance by selling cheap tickets that are inevitably resold later for more, these musicians could just setup an auction website, like eBay, where the tickets are continually bid on till a week or couple days before the performance. However, they often choose to play to the crowd instead, by issuing diatribes like this guy. After all, telling your blue-collar fan that he can't sit up front because the rich fans priced him out isn't exactly great PR for the typical anti-establishment rock musician. ;) And that's just for the few who understand the economics, most probably don't. Anyway, who cares, the market enters in whether these tards want it or not.

 
At 2/15/2011 2:33 AM, Blogger David said...

ACG:

True, for sure, but that doesn't answer the concern of a band wanting to give all its fans tickets they can afford. To do this they'd have to either have many shows or somehow block resellers from getting a hold on so many tickets.

 
At 2/15/2011 2:41 AM, Blogger KauaiMark said...

Here's an idea! If the band let everyone in for free, there would be no scalpers. Problem solved!

(...of course the band then starved and everyone lost out)

 
At 2/15/2011 2:43 AM, Blogger Ron H. said...

EG

"So the problem here is not economic as much as it is technological.

No, the problem is still economic. Why do you care who you buy your ticket from? As ACG pointed out,if the tickets were correctly priced to begin with, there wouldn't be a secondary market. And as Sprewell suggested, the best way to correctly price the tickets is by auctioning them.

The correct ticket price for that final LCD soundsystem concert is the market clearing price which fills every available seat, while leaving no one without a ticket who wanted one and was willing to pay the price. This could be determined by auction, or by allowing unlimited secondary selling.

 
At 2/15/2011 9:37 AM, Blogger morganovich said...

wow, wait, a celebrity with stupid political or economic views?

who would have thought that could happen...?

 
At 2/15/2011 11:13 AM, OpenID The Unqualified Economist said...

Your first hint that LCD is not quite mentally all there is that they are retiring from music at 41 (lead singer) because it is 'embarrassing'. Seems to me that all this demand just shows how much potential income he is passing on because something about being 41 is innately embarrassing? Now, THAT seems irrational...

 
At 2/15/2011 12:01 PM, Blogger NormanB said...

The degree of ticket scalping is directly related to the mispricing of the tickets in the first place. Venues should initiate an EBAY type bidding system for tickets. Don't complain boys, act.

 
At 2/15/2011 1:02 PM, Blogger EG said...

The degree of ticket scalping is directly related to the mispricing of the tickets in the first place. Venues should initiate an EBAY type bidding system for tickets. Don't complain boys, act.


This was probably one of the only great points here. One of these bands needs to create some sort of way to bypass the ticket sales leaders such as live nation and ticketmaster and implement their own system. This could eliminate all of the fees that can be about 20% of the ticket and therefore put the tickets on a bidding system which makes plenty of economic sense.

For the guys who says that I am missing the economic principle you are mistaken - I do understand, but there is a bigger issue at hand and eventually these musicians need to take control of it.

Radiohead did it right back a few years ago when they allowed you to pay any price for their album that was downloaded online. They made allot of money with relatively NO cost.

Solution - sell your own tickets. This is the only way to break the monopoly that is ticketmaster/livenation.

There are much more issues at hand other than the basic economics of supply and demand.

 
At 2/15/2011 3:14 PM, Blogger Jeff said...

Interesting points made in the article, but aren't there concerns relating to the cross-elasticity of tickets and concessions?

 
At 2/15/2011 3:56 PM, Blogger Ron H. said...

EG

"For the guys who says that I am missing the economic principle you are mistaken - I do understand, but there is a bigger issue at hand and eventually these musicians need to take control of it."

What exactly IS the bigger issue, in your view? You haven't made it clear.

 
At 2/15/2011 6:04 PM, OpenID Sprewell said...

EG, it would take a knowledgeable computer programmer a day to set up an auction site that would easily handle the load of this or most other bands. So where's the monopoly? The only reason livenation has so much power is because musicians are retarded, they could pay someone to build a website for far less money. According to this anti-merger post, livenation has deals with the big concert venues too, all that means is that this band would have to find a venue that doesn't have a deal in place and given the thousands of venues out there, I don't think that'd be a problem. And horrors, livenation might go to auctions for ticket pricing, leading to a $1k ticket! Oh no, that money will go to the band now, rather than to a scalper, we wouldn't want that! Livenation might push the line with egregious fees, but now that the recorded music business is dead, live concert fees have to go up to make up for it (yes, all that free music people download has a price). Either that or musicians' pay goes down, frankly I wouldn't care if the whole market disappeared, as I don't listen to music. :)

 
At 2/15/2011 6:45 PM, Blogger Ron H. said...

"Interesting points made in the article, but aren't there concerns relating to the cross-elasticity of tickets and concessions?

No.

 
At 2/15/2011 6:54 PM, Blogger Mr. Econotarian said...

1) Brokers are risk managers for promoters. They purchase large blocks of tickets at a price that makes the promoter happy while taking the risk that they can sell them for more. Brokers often need to sell tickets below the price they purchased them at.

2) Ticketmaster is a risk manager for venues. Those "fees" largely go back to venues as assured fixed payments. Venues often have large fixed debt to service, and fluctuating income doesnt work well for them. As a commenter mentioned, anyone could write a ticketing system. Being an effective risk manager requires more.

Some folks (like baseball an soon AEG) are insourcing ticketing risk management, which is the real competition.

 
At 2/15/2011 9:25 PM, Blogger EG said...

Ron -- the bigger issue of this in my mind is the scalpers and the programs in which they get access to the tickets. The idea of auctioning off tickets makes allot of sense and they need to make this happen. The problem with the tickets are that most of the venues are owned an operated by these ticket companies or have affiliations with them that require you to go through their ticket broker.

Detroit is a good example as most of the major venues seating over 1000 people go through livenation. Recently there was a show in a small venue that I attended that was billed as $20 and then there $10 in fees. 50% of the price in fees. Yikes.

Anyway, there is obviously room for allot of improvement in this arena and hopefully some smart business person or economist will realize this and create a new method --- or maybe it is already happening.

 
At 2/15/2011 9:30 PM, Blogger Hydra said...

If that's the way they feel about it, write a ticket contract that is nontransferable. If you agree to the nontransferrable contract, you ate stuck with the tickets, unless you return them to the band. The band makes more money by charging a restocking fee.

 
At 2/15/2011 9:34 PM, Blogger Hydra said...

How about tickets sold only at the door?

 
At 2/15/2011 9:57 PM, Blogger EG said...

Non transferable could be a good idea but not sales at doors - that would be tough especially if people travel. I think the auction site makes sense, but not sure if it will fix the bands original concern - getting their ticket at a reasonable price to their fans - which we all know that reasonable price is what people are willing to pay. This debate will go on for a long time. Will be interesting to see what happens.

 
At 2/15/2011 10:59 PM, Blogger Ron H. said...

EG

"Ron -- the bigger issue of this in my mind is the scalpers and the programs in which they get access to the tickets."

What can possibly be wrong with someone buying tickets in hopes of selling them for more? If they are able to do this, it proves that the tickets were under-priced to begin with.

One of the benefits of scalping is that it makes tickets available later for those who really want to attend an event, but for whatever reason, were unable to buy tickets when they went on sale.

Imagine that you are at work when tickets for that final LCD concert go on sale, (if you are in Detroit, maybe just imagining you are at work is enough happiness for one day) and by the time you are able to order one, they are sold out. Resale isn't allowed, so you are just SOL. Does that seem fair? You might be willing to pay a lot more than face value for a ticket, because you really wanted to see that final concert, but it isn't going to happen. Tough luck.

What you should really hope for at that time is a scalper.

You know, we tend to admire people who are able to buy low and sell high if they are in the stock market, housing, or antiques. In fact there are TV programs about such things, and we marvel at how clever those people are. If you bought a car for $5000 and sold it for $8000 you would congratulate yourself for months and brag about it every chance you got, but somehow when it comes to tickets we consider anyone who attempts to do the same thing to be scum. I doesn't make sense.

Mr. Econotarian made some good points about risk management in his comment just above your last one. I encourage you to read it.

Although band members may be retards, and have no sense, someone that manages their finances should advise them that they cannot repeal the laws of supply & demand. By pricing tickets too low, as a "favor" to their fans, they are likely to attract more fans than there are tickets. That could mean many will be left out. By allowing the market to determine the price, the exact number of fans who want tickets will get them at that price. What could be more fair?

You might not be as happy as you think with an auction system, as prices might rise beyond what you are willing to pay. It could be a real test of how big a fan you really are.

 
At 2/15/2011 11:47 PM, OpenID Sprewell said...

If bands really wanted to put out cheap tickets, there's a simple solution for that: tour like crazy. Raise the supply of tickets and the price falls, simple economics. Obviously someone told this band that since they're doing it, nothing stopping every other band whining about scalping from doing the same.

 
At 2/16/2011 6:54 AM, Blogger Jason said...

If you are in Detroit, maybe just imagining you are at work is enough happiness for one day

Ok, now thats just cold.

 
At 2/16/2011 10:11 PM, Blogger Ron H. said...

Jason

"If you are in Detroit, maybe just imagining you are at work is enough happiness for one day

Ok, now thats just cold.


I know, I'm sorry. Sometimes when I'm annoyed I just can't help myself.

 
At 2/19/2011 9:43 AM, Blogger EG said...

No reason to rip detroit to shreds -- they are doing their best (maybe). If we want to have a good economic discussion lets discuss how we can turn around that city.

Dont be annoyed Ron. I really understand your points and they are well taken. Obviously his band should have booked more "farewell" shows -- that much is obvious. I have bought scalped tickets many times and sometimes they are lower then face value - hence the supply and demand (Especially pistons tickets which are basically free).

Good debate and hopefully bands will learn from this and hire better management!!! Maybe there is some job opportunities out there for some really smart economists?

 
At 4/02/2011 7:54 AM, Blogger Loyal fan and mom said...

What about those of us that want to go to these concerts but can't AFFORD to because we are being priced out of the market by these so called "legal resalers"?

 

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