Market Power

Why Are Hannah Montana Tickets So Expensive?

Reader Mark Stratton sent me this Yahoo! article about the recent brouhaha about high-priced Hannah Montana tickets on the secondary ticket market.  The third paragraph gets right to the heart of the matter:

"The more fundamental issue is that promoters of the Hannah Montana series apparently haven't priced tickets commensurate with demand, opening the door to a secondary market with much higher prices," the Fed said.

Here is the article from the Federal Reserve Bank of Richmond quoted in the Yahoo! article.

As I noted in this post from awhile back, there are some acts who really understand their markets.  Scalpers have few inefficiencies to exploit in these instances.

The Fed article does discuss something of interest that those trying to get hot tickets know all too well:  scalpers are using technology to essentially cut in line in virtual ticket queues.  This is something that involves IT and legal issues that I cannot comment on at this time.  But the Fed article gives some market-based recommendations on what might be done to minimize the impact of virtual line-cutting.

Early Returns on Ticket Scalping in Minnesota

The St. Paul Pioneer Press has an article about the resale market for tickets here in Minnesota now that scalping is legal.  The lessons learned so far?  Not much:  scalping is risky; some acts price their tickets "correctly" (i.e. they know the market and don't leave much potential for scalpers to earn a profit), other acts don't assess the market "correctly."  Those that set their prices "too low" create opportunities for scalpers. 

But we knew that already.

More on Legalized Scalping in Missouri

A recent St. Louis Post-Dispatch article on the proposed legalization of scalping in Missouri is a good read.   As noted in an earlier post, a big reason for this legislation is that the internet now allows sports teams to obtain revenues from ticket scalping.  But the first part illustrates why laws that restrict the upward movement of prices and, consequently, voluntary exchange are often pointless:

People trying to skirt Missouri's anti-scalping law have come up with some
creative ways to make a profit on sports tickets.

Consider the St. Louis man who on Saturday sold two tickets to a Cards-Cubs
game on eBay for a $79 profit.

To circumvent the law, he said that he was selling the tickets at face value
but that any additional proceeds would pay for a "decorative paper clip" to
fasten the tickets.

Meanwhile, fans who bought last-minute tickets on StubHub.com to this weekend's
Cardinals games with the Reds had to drive to Fairview Heights to collect their
tickets.

The broker avoids Missouri's anti-scalping law by conducting transactions
outside the state. Missouri's scalping law made it a misdemeanor to resell a
sports ticket for more than the printed price. Legislators say that enforcing
it especially with the advent of the Internet, has been nearly impossible and
pointless.

When I was a child, my friends and I would make snow dams in the street to create lakes in which we could play with our toy boats.  But water always seeks the deep and the snow dams would eventually erode.  So it is with legislation that caps prices.  When government erects such a barrier to a transaction, people often find a way around that barrier.

Legalized Scalping in Missouri

The state of Minnesota recently legalized the practice of scalping tickets.  The Missouri Legislature is considering lifting a similar scalping ban in that state as part of an overall "economic development" bill.  The bill is supported by all of Missouri's major sports teams.

Skip Sauer at The Sports Economist writes:

The internet obviously made it much easier for buyers and sellers to exchange tickets to sporting events, and I'm all for loosening the restrictions on secondary markets. It should surprise no one that former opponents of scalping (the sports franchises) are now in favor, given that they can get a piece of the action. As has been pointed out here before, resale demand increases the value of the initial sale as well. Thus the franchise can win on both ends, particularly by earning a return from offering a safe and secure exchange mechanism. The only losers are the ticket touts operating under the corner lamp post. Long live ticket scalping!

Historically, teams have had to deal with some of the consequences of ticket scalping, such as dealing with counterfeit tickets, losing control over who can obtain tickets to games, and having to deal with pushy scalpers outside of stadiums and arenas (see here).  But until the internet made it possible for teams to get in on the action, they didn't receive any of the benefits.  Now they can.  So it's understandable why they supported scalping bans historically and why they have changed their tune recently.

Ticket Scalping and Minnesota Nice - Part Deux

I'm apparently on a scalping kick.  A few years back, some close friends from Missouri traveled to "The Cities" for a conference.  They decided to take in a Vikes' game, but it was sold out.  So they had to look for scalpers.  My friend Craig, trying to do his best Minnesota accent, told me what one scalper they approached told them:

Well, see, I'd like to get $80 dollars each for d'ese here tickets.  Ya know, I t'ink dere's a fella around the corner who has nice tickets for $70.  You might check with him first.

How can you prosecute Minnesota nice scalpers?

Ticket Scalping and Minnesota Nice - Part Un

Ticket scalping is now legal from the state of Minnesota's point of view.  Bill Polley notes an article that says prosecutions of scalpers is down over the past few years.

Last year I bought a ticket to the Minnesota Renaissance Festival from a scalper.  At that time I didn't know how much the gate prices were and I was wary about getting duped.  My wariness must have showed on my face because the fella said "the tickets at the gate are $25 and I'll sell you this one for $15" (I'm not sure those were the exact prices, but those are close).  "You get a cheaper ticket and I get beer money."

Gains from trade and beer to boot - how could I resist a man that thinks like an economist?  I took the chance the fella was being Minnesota nice and bought them.  He was being on the level and I enjoyed a hot, dry day at the Ren. Fest.

Ticket Scalping: Who Determines the Value?

King on what determines the value of tickets:

To paraphrase a Paul Heyne line, worth is always worth to someone. Things don't have a worth. People give things worth. That is, the worth something has is reflected by how much people are willing to give up to get it. If I'm willing to pay more than the face value for a ticket, that's because it's worth more to me. If I force sellers to sell for no more than face value, that ticket may go to someone who values it less than I do. Is that Minnesota nice?

Some fear that the presence of scalping will drive prices upwards.  I doubt this will be the case for several reasons (more here).  One of the big reasons is that the presence of scalping does nothing to alter the underlying value people have for events (and thus the demand for tickets). 

As I mentioned in that earlier post, ticket prices are based in part upon uncertain demand.  After tickets go on sale, more information about the quality of the event becomes available.  We learn if our favorite band is not playing up to its capability.  Maybe the Cubs are playing better than expected.  There's no reason to expect that event holders always hit their mark.

If there are a lot of scalped tickets going for above face value, that tells you the event holder underestimated the demand for tickets.  All the scalpers are doing is responding to some sort of updated demand curve.  They are not being Minnesota naughty or Minnesota nice.  They are responding to people's updated valuation of some event a valuation which has nothing to do with the presence of scalpers.

Ticket Scalping Becomes Legal in Minnesota

As of today, ticket scalping becomes legal in the state of Minnesota for the first time since 1913 (according to this Star Tribune article).  While local governments can still ban or regulate the practice, the state of Minnesota will not.

The demand for an event is based upon many of the usual factors (the income of buyers, prices of substitute goods, etc).  The quality of the event also matters.  In many cases, such as with sports and some concerts, the quality of event is unknown at the time that prices are set.  Therefore, ticketing agencies set prices with an eye towards the expected demand for an event.

For example, consider the simplest of economic models to explain the setting of prices and the risks faced by scalpers.  Suppose a risk-neutral event holder has 10,000 tickets for sale, all tickets will be priced the same, and there is an equal chance that the demand for the event will be either high or low.  If the holder knew the demand would be high, he could set tickets for $50.  If the demand were known to be low, then he'd charge $30.  But from the event holder's point of view, the expected demand is midway between the high and low demands, so he sets a face value of $40.

What will scalpers do?  Ticket scalping represents a secondary market in which holders of tickets resell their tickets to presumably the highest bidders.  Since scalpers are, basically, speculators on tickets, if they feel the expected benefits from scalping outweighs the expected costs, then they will snatch up tickets.  If not, then they won't buy tickets.

Because scalpers are speculators, they provide a service similar to that provided by other speculators:  they help ensure that tickets will be available to those who are willing and able to buy them at whatever the market price "should" be - that is, they help equilibrate actual demand with the supply of tickets.  Since consumers of tickets don't know the quality of an event before it happens, they take a risk that the event may suck.  Scalpers, by ensuring that there are adequate tickets available, help consumers mitigate risk.  If a scalper earns a premium on each ticket he sells, a portion of the premium can be thought of as compensation for taking that risk.  All else equal, the higher the premium, the more tickets scalpers will offer.

Of course the real world is much more complicated than this.  Ticket prices differ between sections, the demand for events is often constantly changing, scalpers face arrest in some cases, and some event holders price discriminate in various ways.  I will touch on some of these below, but this simple model captures the gist of the problem.

Some argue that allowing scalping would drive the price (i.e. face value) of tickets higher because there would be more scalpers buying more tickets.  That may be true, but an offsetting effect occurs when there are more scalpers competing with one another.  That should drive secondary market ticket prices down.

Moreover, one of the costs of doing illegal business is the expected fine you'll pay (expected fine = probability of getting caught * fine).  At least some of this cost should be built into the price of scalped tickets.  Make the scalping, and competition between scalpers ensures that this premium goes away. 

You could argue that scalpers also help event holders mitigate the risks they take.  They set their ticket prices based on expected demand.  Some of those tickets go to scalpers who then resell the tickets in the secondary market.  As described above, the scalpers take a risk that the demand will be lower than expected, a risk that would otherwise be borne by the event holders.

But event holders have historically frowned on scalping.  There are nuisance factors associated with scalping (aggressive scalpers and the congregation of scalpers near the entrance to facilities are bothersome to some fans).  Event holders also lose some control over who comes to their events.  Indeed, my understanding is that England has instituted scalping laws to help teams combat hooliganism.  But while the scalpers get the returns, the event holders bear many costs without adequate compensation.  So it is understandable that they have resisted the relaxing of scalping laws.

Another concern of event holders are counterfeit tickets.  Some fear that allowing scalping opens the door to more counterfeiting.  But making scalping legal should limit the ability of counterfeiters to do their dirty work.  Allowing legal scalping will insure that there are more legal tickets on the streets, lowering the secondary market prices, thereby making counterfeiting less attractive.  In addition, scalpers will have an incentive to fight counterfeiting as well.  So it's not clear that increased counterfeiting is something that we should be all that concerned about

On the other hand, the secondary market also represents competition to some event holders.  The ticket prices for some events increase as the event gets closer, as was the case with the recent Brew Fest here in Mankato.  But the presence of scalpers limits the ability for event holders to charge higher prices in the future. 

So what will be the overall effect on ticket prices?  It's hard to say because given the supply of tickets available, it is the demand for the event per-se that is important in determining prices, not the presence of scalpers.  My sense is that, overall, the overall ticket prices that fans end up paying may decrease.  In fact, Depken (2007) writes:

This paper investigates the impact of anti-scalping laws on the face value of tickets in professional football and baseball. Previous theoretical models have suggested that scalpers might cause an increase in prices at the ticket window because they represent an increase in demand. This paper provides a model in which ticket scalping has an ambiguous impact on ticket window prices, making the actual impact an empirical question. Empirical analysis suggest that in cities with anti-scalping laws average per-game season ticket prices are approximately $2 greater in baseball and $10 greater in football. Anti-scalping laws actually increase team revenues, as the laws have no adverse effect on attendance. Thus, event promoters might have sufficient pecuniary incentive to tacitly or explicitly support anti-scalping legislation.

Here is an earlier version of Depken's paper.

For those interested in anti scalping laws, Cato has two excellent articles:  one here and one here, both by Stephen Happel and Marianne Jennings.