Are ticket scalpers really ripping you off?

Tickets for popular events sell out fast. It is a textbook mismatch of supply and demand, a shortage created by a price set below the market clearing equilibrium. The consequence is ticket scalping, people taking advantage of the shortage by selling tickets for a mark-up in the secondary market. It is not a phenomenon peculiar to ticket sales, but exists in any situation where there is no effective rationing mechanism. Automated bots have exacerbated this problem, but ticket sellers are becoming more creative in how they respond.

Scalping tickets at above the original sale value in economics terms represents a form of intertemporal arbitrage. Arbitrage is narrowly defined as risk free profit gained from exploiting price differentials on an identical item, in this case over time. In a situation where an arbitrageur is certain that the demand for tickets will be greater than supply at the face value price, she is able to purchase tickets now and be assured of a profit on resale, once the supply of tickets in the primary market is exhausted. Of course, there will never be absolute certainty that that demand will exist – perhaps the event will be enraptured in controversy or a sporting event will lose significance for finals consideration – but it does approximate a pure arbitrage opportunity.

In most markets, the rationing mechanism is the iterative adjustment of price and supply. High demand is met with price increases, increased production, or a combination of both, until an equilibrium between supply and demand is approximated at a given price. Kanye West’s limited edition Nikes, the Air Yeezy II, was deliberately limited edition and sold out in seconds, meaning that there was no opportunity to add more production or to iterate on pricing decisions. As a result, the US$245 retail pair of shoes was regularly selling for US$3000-5000 online in the secondary market.[1]

Though this scarcity is deliberately created, the scarcity in event tickets is often unavoidable. Important sporting matches can only be played once, and Beyoncé has only so much time to hold concerts. Interestingly, rationing tickets by price is often avoided in an attempt to retain some notion of accessibility. Often it is an attempt to ensure that true fans, and not just the rich, are able to purchase tickets. In other cases, it is because a profit is either unnecessary or discouraged; the student-run Commerce Ball, for example. The end result though is not wider availability, but a rationing by the peculiar combination of speed and luck. In the primary market, the tickets do not go to those with the highest willingness to pay, but to those with the good fortune to have been able to purchase a ticket in time.

The profit opportunity for an arbitrageur lies in buying these tickets for face value and then using a price based rationing mechanism to sell them. This is commonly an auction; a tactic often used in sales with many potential buyers. Auction markets ensure a good is sold to the buyer with the highest willingness to pay, and the seller receives the highest possible payment. Ticket purchasing bots have compounded this problem for ticket sellers, being able to amass hundreds or thousands of tickets in an instant, ready for resale. In response, ticket sellers have sought out mechanism to disrupt these profits.

One such mechanism to halt arbitrage involves linking tickets to a specific individual. This tactic has been effectively used by the airline industry for years, where prohibitive fees for changing the name on a ticket make it all but impossible to resell. After the 2005 Splendour in the Grass tickets sold out in just over a day, the organisers implemented a similar policy, printing a name and date of birth onto each ticket to prevent resale. They effectively remove the possibility of resale, and thus remove the profit opportunity in ticket scalping.

Others have effectively given in to using price to reduce demand. Hamilton, the unprecedentedly popular Broadway show about America’s founding fathers by Lin-Manuel Miranda, increased premium ticket prices to US$849 in June. That’s not far below the US$872 average ticket price found on the ticket-reselling site StubHub.[2] The producers said that this was an effort to recoup some of the millions of dollars in revenue lost to resellers. This followed an impassioned opinion piece by Mr Miranda in the New York Times decrying the use of bots to buy tickets in bulk and calling for stronger legal protection.[3] But outside of a distaste for others profiting on his work, the bots do not affect Mr Miranda directly, in fact they probably prove his success.

Tickets selling out at face value results in the maximum economic gain Mr Miranda can expect. That this happens near instantaneously with ticket bots is surely an added bonus. No fewer patrons end up with tickets, they just need to pay more for them. Additional legal protection would be much less necessary if the tickets were not priced so far below what the market could bare to begin with. The price increase is recognition that these profit opportunities exist, and if the supply of tickets is not rationed by price in the primary market, the opportunity will be exploited by someone else.

In reverence to the notion of accessibility, and potentially to seek to avoid being painted by the same greedy brush as the scalpers, some Hamilton tickets are also offered by lottery. Potential buyers bid for the right to purchase one of 46 tickets available for just US$10 each, on the day of the show, to try and minimise the opportunity for resale.[4] Lotteries are becoming increasingly popular as wholesale replacements for the usual first-in-best-dressed systems.

By limiting the tickets available to individual buyers, and removing the technological advantage of bots on online ticketing platforms, tickets are more likely to be purchased in the primary market by those who actually want to go to the event, and any resale profit would be dispersed among many ticket holders, rather than centred in a few commercial reselling operations.

The pricing model for event tickets is unusual. An aversion to prices which are so high that they price significant sections of the fan base out of the market, combined with constraints on supply, often result in markets with no effective rationing mechanism. Accordingly, a shortage of tickets creates an opportunity for arbitrage profit in reselling tickets. Lotteries and identity requirements though, while effective at disrupting the secondary ticket markets, tend to miss the point; consumers wouldn’t pay such high mark ups if they didn’t think it was worth it. With limited supply, rationing by any mechanism other than price leaves profit on the table. It should be no shock that someone else will seek to capture it.

[1] Neal, M. (2012, June 6). Kanye West’s much-hyped Air Yeezy 2 sneakers going for $80K online. New York Daily News. Retrieved from http://www.nydailynews.com

[2] Paulson, M. and Gelles, D. (2016, June 8) ‘Hamilton Inc.: The Path to a Billion-Dollar Broadway Show. New York Times. Retrieved from http://www.nytimes.com

[3] Miranda, L. (2016, June 7) Stop the Bots from Killing Broadway, New York Times. Retrieved from http://www.nytimes.com

[4] Romano, M. (2016, June 13). ‘Hamilton’ Wins 11 tony Awards as Ticket Prices Rise to $849. Bloomberg. Retrieved from http://www.bloomberg.com

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