Saturday, 30 December 2017

The economics of ticket scalping

In yesterday's post about the increasing role of economics in sports, I mentioned this 2009 article by Ross Booth (Monash University), published in the Australian Economic Review. In the article, Booth discusses some of the key topics he teaches in sports economics, one of which is the economics of ticket scalping, and how ticket scalping increases economic welfare. For example, this article from September published in The Conversation, by Paul Crosby and Jordi McKenzie (both Macquarie University) notes that:
...there is an argument that ticket scalping actually enhances the total welfare of concert goers and sports fans. Scalpers act to distribute tickets to those who value them the most, or, as economists’ would say, they increase the allocative efficiency of the market.
Secondary markets for tickets allow potential buyers to indicate how much they want to go to the event – their “willingness to pay”. If tickets can only be bought at a single price on a first come first serve basis, then some people who really want to go will be left out. Secondary markets permit these mutually beneficial exchanges to take place.
Online platforms for buying and selling tickets actually increase this allocative efficiency
However, this traditional view that is used by many economics teachers is not correct, as I have explained before (see here and here). However, this point bears repeating.

Consider the diagram below. The supply of tickets to some event S0 is fixed at Q0 - if the price rises, more tickets cannot suddenly be made available because the capacity of the venue is fixed (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 (a shortage) - the quantity of tickets demanded is Qd, while the quantity of tickets supplied remains at Q0.

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 venue or the seller) 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 increase total welfare - their actions don't affect total welfare at all, just the distribution of that welfare between the parties.

However, the above analysis allows us to think about what would be required for ticket scalping to increase total welfare. That would happen if the higher price induced more events (since each event has a fixed number of tickets, the only way to increase total welfare is to have more events). However, that would only happen if the sellers (not the ticket scalpers) received a higher profit from each event (incentivising them to schedule more events). As shown above, the action of the scalpers doesn't affect producer surplus (it stays P1CDO with and without scalping), and so those incentives for the sellers don't materialise.

Crosby and McKenzie do correctly note that online platforms for re-selling tickets:
...arm buyers and sellers with ever increasing amounts of information, and the time and expenses associated with the purchase of each resold ticket (known as “transaction costs”) are greatly reduced.
The main downside of ticket scalping is that some (previously very lucky) consumers could earn a huge consumer surplus by buying their tickets at a much lower price than what they were willing to pay for them, but must now pay a higher price. You might think this unfair, but as I pointed out in an earlier post:
...you probably also think that the high price of milk is unfairthe high price of petrol is unfairthe high price of electricity is unfair, etc.
Despite the actions of ticket scalpers having little effect on economic welfare (they just re-distribute it), governments do seek to clamp down on it. Crosby and McKenzie briefly discuss technology as a means of reducing scalping, but a more recent Conversation article by Keith Parry, Aila Khan, and Blair Hughes (all Western Sydney University) lays out the future of ticketing in more detail:
Internationally, there have been some interesting developments amongst teams, venues and ticketing companies that may eliminate scalping and improve the ticketing experience.
It may not be long before all fans can take advantage of innovations such as mobile-only tickets, biometric access, and even microchipped tickets...
Looking to the future, it may not be long until tickets are physically linked to individuals and our iconic sporting venues are accessed with the swipe of an appendage.
In such a world, paper tickets will become a thing of the past.
One cannot feel that something is lost without the physical memento of a sporting event provided by a ticket stub. The scalpers and bots have much to answer for.
It's not the scalpers or bots that have much to answer for, it's the ticket sellers who consistently under-price event tickets. If they didn't do so, then the scalpers and bots would have no opportunity to profit.

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