Comments on economics, mystery fiction, drama, and art.

Wednesday, June 22, 2005

Scalping, Charity, and Markets

There's recently been a bit of comment [for example, at Marginal Revolution , Reason, Knowledge Problem, and crooked Timber (twice)] about the resale of tickets to Bob Geldof's LiveAid 8 concerts. For those of you not following this wrangle, the situation is, essentially this:

The tickets were sold at a set price to people who entered a raffle (by submitting a text-message for a charge of approximately $2). Subsequently, some of the people who bought ticekts re-sold (or tried to se-sell) their tickets on eBay. Geldof charged that the re-sellers were trying to make money on the backs of the world's poor, an argument for which he was taken to task by Tyler Cowen at MR, Julian Sanchez at Reason and Lynn Keisling at KP. John Quiggin and Henry Farrell at CT attempt a defense of Geldof.

The underlying economic problem, of course, is the existence of scalping and its consequences. For scalping to exist, the tickets may be underpriced relative to the market-clearing price (which may be at a price above that which sells out the venue), which allows some purchasers to buy-and-resell at a profit. One clear example of the failure to establish a market-clearing price is the presence of excess demand at the announced price. Suppose a venue can accommodate an audience of 15,000. Assume a price of $50 per ticket. If at that price 20,000 people want to buy tickets, then the tickets are (clearly) underpriced relative to the market-clearing price and the opportunity to scalp exists. Indeed, some fortunate purchasers may discover they can re-sell tickets at a price that induces them to sell and not attend the event.

This raises the question of why a event promoter would underprice tickets. I can think of five possibilities.

First, demand may be uncertain and the promoter simply underestimated demand. We would think that for a profit-motivated promoter, this would not be a long-term sort of error. Failure to properly estimate demand simply leaves profits on the table, and promoters who are bad at estimating demand would, we think, be driven out of business by promoters who are good at it. [Or the technology for altering ticket prices in response to accumulating information about demand may be costly or non-existent (this is, obviously, increasingly not a consideration).]

Second, the promoter may not be interested in maximizing profits. But these promoters would generate smaller event grosses than would profit-maximizing promoters, and, if performers' contracts include provisions paying them a percentage, then non-maximizing promoters would be driven out of the market.

Third, performers may have an incentive to encourage lower (box-office) prices, as a means of enhancing their own popularity. By insisting on lower ticket prices, they may induce people to think that they care about their fans (indeed, they may actually care about their fans).

Fourth, the promoter may have a longer-term interest than simply maximizing profits on an individual event. That is, sacrificing current profits may induce ticket-buyers to regard events put on by that promoter as being "fairly priced," and thus induce them to substitute events sponsored by that promoter for other events. Or because allowing younger, lower-income fans to purchase tickets for todays concerts expands the market for tomorrow's concerts. This, incidentally, is only likely in markets with a small number of promoters.

Fifth, and finally, the promoter may be someone like Bob Geldof, who does not do promotion for a living, and thus probably does not need, on an on-going basis, to do a good job of estimating demand. Note, however, that Geldof will leave money on the table for the cause he's promoting--resolving world poverty--by leaving money on the table. Geldof's argument is, in part, that he has persuaded performers to donate their talents (thus reducing the costs of promoting such concerts), and that their willingness to do this is related both to the cause and to the existence of low ticket prices. Without low ticket prices, then, performers would insists on getting paid (an amount equal to or greater than the increased revenue), thus raising no more money for the cause than a low-ticket price would. (Jargon--the supply curve of charity concerts would shift to the left.)

Whatever one may think of Geldof's position, it's not wholly illogical. Although I think it's wrong. Were I in his situation, I'd argue that raising more money is better than raising less money. and that the performers should support efforts to make the pot as large as possible.

But scalping can also exist even if tickets are prices at the market-clearing price.

Assume two types of initial purchasers. One purchases for the purpose of attending the event. Such a purchaser might, indeed, be induced to re-sell tickets, if s/he discovers that these tickets can be re-sold for a (large?) premium. If all initial purchasers buy with the intention to attend the event and if they all pay the market-clearing price, then no one will have an incentive to re-sell. Why?*

The second type of purchaser buys with the intention of reselling. This has two consequences. First, it may increase the overall demand for tickets, and thus push the market-clearing price up. Second, those buying for re-sale may displace some purchasers-for-use who are willing to pay more than the market-clearing price. The second of these instances gives rise to the potential for re-selling at a profit.

How can concert promoters prevent scalping in the situation in which some demand is solely for re-sale? The answer is simple. They have to find some way to price-discriminate--to charge different buyers different prices. And what's the easiest way to do this? To auction the tickets, not to sell them all at the same price. The increasingly widespread use of the internet to sell tickets makes such a practice extraordinarily easy; hell, a promoter could even use eBay as his/her auction site. Auction theory suggests that the winning bids would exhaust consumer surplus, thus preventing scalpers from finding a re-sale market.

Why don't promoters do this? Maybe because they haven't thought of it yet. Maybe because the long-term considerations suggested above make auctions a non-maximizing strategy in the long-run. Maybe because they are reluctant to price lower-income fans out of the market (which is also something of a long-run consideration).

How would you react to a world in which event tickets were auctioned? Would you regard that as a more or less fair way of doing things?

*At the market-clearing price, everyone willing to pay that price, or a higher price, buys tickets. No one who is willing to pay a higher price than the market-clearing price does not buy a ticket. Therefore, a "scalping" market cannot occur. (Caveat 1: If market demand changes between the time at which tickets are sold and the event, then the opportunity to re-sell at a profit may emerge. This may happen if the performers or the event becomes "more popular" in the interim.) (Caveat 2: Some initial purchasers may find that they are unable to use their tickets and may thus seek to re-sell them. If the price they paid was a market-clearing price--and the market demand has not changed--then they may re-sell, but only at a loss.)


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