Wednesday, 1 July 2015

The Super Rugby final and ticket scalping

With the Super Rugby final coming up this weekend, ticket scalping has been in the news again. This New Zealand Herald editorial says:
Steven Joyce, the Economic Development Minister, has made it clear that he is unhappy tickets for the Super 15 final in Wellington are fetching up to $1500 online. He is not alone. It is never pleasant to watch scalpers cash in on the desperation of genuine fans who missed out during regular ticket sales. But Mr Joyce does not favour changing the law. That, he says, would be an over-reaction. Rather, event promoters should be thinking more about how to ensure tickets reach the public.
Ticket scalping is an old favourite of economics teachers, since it helpfully illustrates the concepts of consumer and producer surplus, and what happens when there is excess demand. Consider the market for tickets to the Super Rugby final in the diagram below. The supply of tickets S0 is fixed at Q0 - if the price rises, more tickets cannot suddenly be made available, because the capacity of Westpac Stadium is 34,500 - that is the maximum number of tickets that can be sold, regardless of price (note the diagram assumes that the marginal cost of providing tickets up to Q0 is zero).


Demand for tickets is high (D0), leading to a relatively high equilibrium price (P0). However, tickets are priced at P1, below the equilibrium (and market-clearing) price. At this lower price there is excess demand for tickets - the quantity of tickets demanded is Qd, while the quantity of tickets supplied remains at Q0.

At this lower price, there are many people who want to buy tickets, but there are not enough tickets to go around. There are some people who are willing to pay more than P1 for a ticket, but have missed out on purchasing one. It is that fact that encourages the actions of ticket scalpers. The scalper purchases a ticket at the low price (P1), and finds someone who was willing to pay a higher price to sell the ticket to, pocketing the difference in prices as profit. If there are enough scalpers in operation, then the price the scalpers receive will eventually get to P0.

Moreover, the actions of the ticket scalpers doesn't change total welfare at all. It simply re-distributes it. With the low ticket price P1, the consumer surplus (the difference between the price the consumers are willing to pay, and the price they actually pay) is the area ABCP1. Producer surplus (essentially the profits for the rugby union) is the area P1CDO. Total welfare (the sum of producer and consumer surplus) is the area ABCDO. At the higher price P0 due to the actions of scalpers (buying at P1 and selling at P0), the consumer surplus decreases to ABP0, while producer surplus remains unchanged. The scalpers gain a surplus (or profit) of the area P0BCP1, and total welfare (the sum of producer and consumer surplus, and scalper surplus) remains ABCDO. So the ticket scalpers don't reduce total welfare - their actions don't result in a deadweight loss.

So there is no change in economic welfare, but isn't the action of scalpers unfair? Perhaps, but notice that the actions of the scalpers will eliminate the excess demand for tickets. At the higher price P0, the quantity of tickets demanded is equal to the quantity of tickets supplied - no one who wants to buy a ticket at the higher price is missing out on a ticket. And scalpers wouldn't want to raise the price above P0, or else they would be left holding tickets that they are unable to sell. You  might think this is unfair on consumers, but then you probably also think that the high price of milk is unfair, the high price of petrol is unfair, the high price of electricity is unfair, etc.

The reality is that when there is excess demand, prices increase. You might be thinking that the price of Super Rugby tickets is set, and it is true that the face value ticket price is set by the rugby union. But you need to take into account the difficulty of getting one of the scarce tickets. If it takes a 15-hour overnight stay to get your hands on a ticket, you need to factor that into the cost of a ticket. The cost of a ticket is clearly already much more than the face value ticket price. And given that it is becoming increasingly popular to hire others to sit in queues for you (see my earlier post on this here), you can't argue that it is necessarily fairer because the time cost is being paid by the person who ultimately uses the ticket.

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