Priceonomics

Earlier this summer, this author hesitated at his computer before loading the website of the Oakland Athletics and buying 4 tickets for an upcoming game against the Red Sox. As a Boston native, the idea of purchasing tickets directly from the team website - and not second hand at double or triple their value - was a novelty, possible only because of Oakland’s small market.

But why is it the norm to buy tickets to concerts and sporting events from scalpers? It seems that sports teams, bands, and the businesses behind them are leaving money on the table - money picked up by scalpers and their more reputable cousins like StubHub. As Adam Davidson of Planet Money writes in the New York Times:

Few products are so underpriced that an entire subsidiary industry exists to take advantage of the discrepancy. When there is excess demand for a new car or phone, some people might sell theirs at a markup on eBay, but there’s nobody across the street from the dealership or Best Buy offering it right away for double the sticker price; there certainly isn’t an entire corporation built on exploiting companies’ failure to properly price items initially. Yet concerts and sporting events consistently price their tickets low enough that street scalpers risk jail time to hawk marked-up tickets, and StubHub makes hundreds of millions a year in revenue.

The difference between iPhones and concert tickets, of course, is that while Apple can ramp up its production of iPhones to meet demand, there are only 16 games in a football season and Rihanna can only give one concert a night. But why isn’t that lack of supply reflected in higher ticket prices rather than the existence of a $4.5 billion ticket reselling business?

In some cases the answer may be the the altruism or egalitarianism of the artist. But while Bruce Springsteen can afford to undercharge, most artists rely on live performances to make a living due to the death of CD sales. Moreover, concert promoters rather than artists usually set ticket prices, and the New York Yankees, whose tickets sell second hand, are hardly altruists. 

Seeking to explain the existence of scalpers and sites like StubHub, Davidson turns to the work of economist Pascal Courty whose research suggests two distinct pricing strategies: charging as much as possible based on the market (so New York City residents pay a premium and concerts in rural areas go for cheaper) or charging affordable prices regardless of venue. Although the second approach may seem “altruistic,” Davidson notes that it can make business sense for artists with staying power:

Performers who undercharge their fans can paradoxically reap higher profits than those who maximize each ticket price. It’s a strategy similar to the one employed by ventures like casinos and cruise ships, which take a hit on admission prices but make their money once the customers are inside. Concert promoters can overcharge on everything from beer sales to T-shirts, and the benefits of low-priced tickets can accrue significantly over the years as loyal fans return.

We see the economic logic, but we’re not convinced. Cruise ships may undercharge for tickets to make their money off booze, but they’re worried about packing the boat in the first place. The existence of scalpers demonstrates that concerts and sporting events could still sell out at higher prices, so why would concession prices take a hit?

It’s also unclear whether loyalty really requires low ticket prices. Research by Princeton economist Alan Krueger found that “older acts tend to have higher prices because they have a loyal fan base, typically made up of older audiences with more disposable income.” 

Instead, we suggest that two perception problems restrain the original vendors from charging higher prices. 

The first is the necessity of pricing tickets affordably to maintain popularity and not risk a populist backlash. One Barbra Streisand concert that charged over $1,000 for some tickets resulted in an uproar that cancelled the show. Supply and demand may say that most tickets are underpriced. But that won’t keep fans from complaining on Twitter, and celebrities live on Twitter.

On the same note, the San Francisco Giants could price tickets so high for a game against the Boston Red Sox that only Facebook employees and Mitt Romney’s family can afford it. The stadium may still sell out and rake in more from concessions than ever before. But it’s the legions of working class Bay residents that make the Giants franchise valuable by buying their T-shirts and watching every game on television. How long would you keep rooting for a team who has priced you out of the stadium? 

Due to scalping, lower prices only help fans so much. But given the mass appeal needed by sports teams and performers, the semblance of affordability and being on the fans’ side is important.

The second perception problem is that failing to sell out a venue, and doing so quickly, is seen as a sign of failure. Chris Tsakalakis, president of StubHub, told ABC: 

"There is this whole mentality within concerts that if it doesn't sell out right away it's not a hit. It just doesn't make sense. Nothing works that way. There isn't a supplier out there that says, 'The first day I put my product out there I want all of it to sell out and I don't want to have any more supply.' What business works that way?"

Just as a Hollywood studio announcing that they signed a huge star for a film at the low price of $1 million will not be seen as a bargain but rather as a sign that the actor’s star is fading, a show that takes until the last minute to sell out (or a nearly full stadium) will not be seen as a sign of perfect pricing, but a disaster. It would be interpreted as meaning that the performer doesn’t have it anymore or that the team lacks a rabid fan base. 

Some musicians are genuinely upset that scalpers foil their efforts to offer all their fans equal access to their shows. But most ticket vendors are not exactly blameless. The New York Yankees dislike StubHub because people see tickets to less popular Yankees games sell for below face value. Twenty eight baseball teams have signed agreements with StubHub to create a formal secondhand market (the Yankees have done the same with Ticketmaster), giving them a cut of secondhand sales while keeping their perception of lower prices on their websites. 

Tsakalakis of StubHub also argues that vendors are not simply making all their tickets publicly available. Whether to ensure a sell out or to get a cut of profits or corporate sponsorships, “before a ticket goes on sale, promoters have already sold a huge chunk of the seats to everyone from fan club members [to] American Express card holders and ticket brokers.” 

At this point anyone buying tickets by sitting in front of their computer with their credit card out, eagerly waiting for tickets to go on sale, is increasingly a schmuck. Companies that use bots to automatically buy up tickets and sell them at a premium later purchase more than 60% of tickets to some shows according to data from Ticketmaster. Vendors try to keep bots from getting tickets, but it’s an arms race that they cannot fully win. 

It’s also a race that individuals are entering as well. A New Statesmen article earlier this month chronicled “the bot wars” of coders building bots to buy their personal tickets (or book them a reservation to a favorite restaurant). Those without computer programming knowledge can buy a bot at ticketbots.net or ask for help from a friendly coder. But otherwise they're crowded out of the market. Vendors’ decision not to allocate tickets based on individual’s willingness to pay - even if well intentioned - increasingly means that tickets are distributed based on people’s willingness to hack. 

Scalpers exist to arbitrage low prices that (in our view) reflect the industry’s desire to instantly sell out and price tickets in a way that doesn’t alienate the fan base. (There’s probably some genuine egalitarianism in there as well.) But they’re just one player in the war for that hot ticket.

This post was written by Alex Mayyasi. Follow him on Twitter here or Google Plus. To get occasional notifications when we write blog posts, sign up for our email list.



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