Fans, and the general public, who are critical of ticket resellers ("scalpers") need to go back to demand and supply basics. Ticket reselling in an open competitive retail market situation like Trade-me is a good thing for fans, not a bad thing. Every resale of an event ticket on Trade me is to the mutual advantage of both the buyer and the seller. There is no coercion. There is no monopolistic price gouging. There are no secret back door dealings.The real question here is Why do promoters price in such a way as to give people the incentive to set up a resale market? Given that such a market exists the promoters and/or the club are missing out on profits. So why didn't they increase the price of the tickets to the game until supply equals demand? Or at least do what is done overseas and set up a resale market themselves? Someone should ask Leitch why profit making opportunities are being ignored. Is the club really so wealthy it don't need to worry about its income? I somehow doubt it.
Wednesday, 17 September 2008
Scalpers are good
Reading Not PC has drawn my attention to the stupid comment made by Peter Leitch that scalpers selling high priced tickets to the Warriors-Roosters match are "bloody mongrels". They are not. They are doing doing both the buyer and seller (themselves) good. Leitch needs to learn a bit of very basic economics. As the guy who taught me microeconomics, Dr John Fountain, has explained it on his blog, Strategic Economics,
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Dang it, I was going to post on scalpers - I guess I can do a post and link to you :)
Regarding the resale market, my impression was that stadiums keep ticket prices down for reputational reasons - they believe that the lower price earns them some "goodwill" and allows them to increase demand for their product in the future.
However, this price is below the market clearing rate - which gives scalpers room to pick up a bunch of tickets and provide them to the people who value the tickets most highly of all those that missed out - thereby increasing market efficiency, and taking a margin for themselves.
Ultimately, its win-win situation for pretty much everyone involved :P
The fact that scalpers are still in business is an interesting topic, well worth posting on, since to me they shouldn't be able to survive. And why do some people try to stop scalpers?
"they believe that the lower price earns them some "goodwill" and allows them to increase demand for their product in the future."
But why do they need the increased demand in the future? If they can fill their stadium at a higher price today why don't they believe they can fill it at the higher price tomorrow? And if they can't, why not lower the price tomorrow to increase the quantity demanded rather than lower it today? A $1 of profit today is worth more than $1 tomorrow.
"If they can fill their stadium at a higher price today why don't they believe they can fill it at the higher price tomorrow?"
Fundamentally, different games are heterogeneous products - the game before this one only sold 6,000 tickets!
"And if they can't, why not lower the price tomorrow to increase the quantity demanded rather than lower it today? A $1 of profit today is worth more than $1 tomorrow."
It isn't really comparing a dollar for a dollar though is it - it depends how much goodwill the stadium expects to get from the lower price for the big game (how much the demand curve shifts).
"Fundamentally, different games are heterogeneous products - the game before this one only sold 6,000 tickets!"
I take your point, but there are some games you know that demand will be higher for, eg finals and semis, so why not charge the market clearing price for these games. Lower demand games should result in a lower price, but we see uniform pricing, why?
"It isn't really comparing a dollar for a dollar though is it - it depends how much goodwill the stadium expects to get from the lower price for the big game (how much the demand curve shifts)."
Two quick points. 1) if they can fill the stadium now why increase demand? If the demand curve shifts right and they don't adjust price all they do is create excess demand, why? To meet the extra demand they would need to build a larger stadium, which they haven't done. 2) even if they would to increase demand why use this pricing strategy which results in lost profits? Isn't there a better way?
Just to clarify myself, this is what I'm thinking.
There is a game with high demand (a semi-final) and a game with low demand (first game of next season) and a historical price for the game (which would have maximised profit on average over a normal season with no semi-final games).
Goodwill appears from people coming to a game, but it diminishes as the price increases from the "historical price" (like a loss function type thing).
In this case, the stadium may have the incentive to not lift prices very much for the semi-final - because the increase in demand for tickets during the first game of the new season as a result of this decision will make them more profit than milking it now (because the movement of the demand curve for the low demand game is sufficient).
As a result, the firm has the incentive to price below the market clearing level for the semi-final game - which in turn creates a role for scalpers.
I appreciate the economic efficiency argument - it begs the question of why the even organizer simply doesn't set up an auction system or charge exorbitant prices from the get-go. Can you imagine the outcry there would be if the organizers set the Roosters-Warriors price at a level at which the tickets are being touted now? They would be strung up...that's because tickets ofthis nature are nearly a public good and thus there are self-imposed regulations if you will, as to how much they can charge.
Matt: An interesting idea. My first point would be an empirical one. The shift in the demand curve for the low demand game would have to be large to cover the lost profits from the underpricing on the high demand game. And given the prices in the secondary market the lost profit would appear to be large. Second, this argument doesn't explain why people like Peter Leitch are so opposed to scalpers. After all by your reasoning they create the market for scalpers. So why are they so anti it? Third, your argument doesn't explain why the clubs haven't set up their own secondary market. If they did they could have the best of both worlds, the goodwill effect and the profits on scalping.
"The shift in the demand curve for the low demand game would have to be large to cover the lost profits from the underpricing on the high demand game"
Indeed. However, I do not see why this would be a big deal - surely such a big movement in demand is conceivable (especially if you believe the goodwill influences demand over the entire future).
Don't clubs usually sell a lot more tickets after performing well in their league? If this is the case - couldn't this be down to the use of goodwill derived during games such as these in the previous season.
"Second, this argument doesn't explain why people like Peter Leitch are so opposed to scalpers"
"Third, your argument doesn't explain why the clubs haven't set up their own secondary market"
The goodwill is a function of perceived fairness - the fact that clubs aren't lifting prices by too much just because it is a big game.
As a result, there is an incentive for the clubs to complain about scalpers and not set up a secondary market - as not doing these things could damage the associated goodwill.
Note I'm not saying Peter is right - I'm just saying it is in his interest to say such things.
"The goodwill is a function of perceived fairness - the fact that clubs aren't lifting prices by too much just because it is a big game.
As a result, there is an incentive for the clubs to complain about scalpers and not set up a secondary market - as not doing these things could damage the associated goodwill."
I have a couple of issues with this. One is that we do see clubs setting up such secondary markets. In the US a number of the sports bodies now have such markets. And I would think they have the same goodwill effect to deal with. In addition I don't see why having a secondary market would undermine the perceived fairness of the ticket pricing. As long as the fans who want to can buy at the regular price, why would the secondary market affect their view of the club? If the issue here is the price that the club fans pay and this hasn't gone up then why should their be an reputational effect for the club?
"One is that we do see clubs setting up such secondary markets"
The situation where clubs set up secondary markets is inherently different to the situation where they do - without looking at data we can't say whether it is because of differing preferences (perceptions of fairness) or some other structural issue.
"In addition I don't see why having a secondary market would undermine the perceived fairness of the ticket pricing. As long as the fans who want to can buy at the regular price, why would the secondary market affect their view of the club? If the issue here is the price that the club fans pay and this hasn't gone up then why should their be an reputational effect for the club?"
Because people will view the a secondary market that is set up by the stadium as a way of "creaming profits" - people will associate the higher prices in the secondary market as the actual stadium setting higher prices.
As a result, it becomes counter productive for a stadium to (in this case) set up a secondary market.
Remember that the goodwill stems from the people valuing some idea of fairness whereby ticket prices do not increase that much in the face of a sudden leap in demand. This is one of the reasons why we see such nominal rigidity in prices for everything in the economy - not just stadium prices.
Of course this is all just conjecture - however, I think it makes sense IF we believed that people value "fairness", in this sense, sufficiently.
"The situation where clubs set up secondary markets is inherently different to the situation where they do - without looking at data we can't say whether it is because of differing preferences (perceptions of fairness) or some other structural issue."
True, but if clubs in NZ suffer from a goodwill issue then why don't clubs in the US also suffer? Are the moral imperatives in NZ that much different from those in the US? If NZ game goers are upset by high pricing I don't see why those in the US would not also be.
"Of course this is all just conjecture - however, I think it makes sense IF we believed that people value "fairness", in this sense, sufficiently."
True. But I guess my point would be that it is the price that the fan has to pay that is the issue here. As long as the fan pays the same for his ticket to the high demand game as to the low demand game, fairness is seen to be done. Thus it is not a barrier to a secondary market. If I'm right then the question is why don't we see these type of markets here?
"If I'm right then the question is why don't we see these type of markets here?"
It is an important question, however given my lack of knowledge about specifics I'd just have to say what I think the important elements are:
1) The stadium would need to be unable to form a market for some reason. This could be regulation, or as we've discussed a specific view of fairness (whereby consumers can credibly commit to punishing firms that do not satisfy their conception of fairness).
2) Other "legal" providers of secondary tickets must be excluded.
3) If potential competition is available, scalpers must be working within the bounds of effective competition - fundamentally, they may be more efficient than an organised secondary market in New Zealand.
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