There was a shortage of Wii games consoles last Christmas, Xbox 360s in 2005, PlayStation 2 consoles before that, and so on, yet the retail price remained the same. To secure tickets for a hot concert, you will usually need to go to a ticket tout, because the regular concert promoters wouldn't dare charge a price that might bring demand down to the level of supply. And when US oil companies raised gasoline prices after Hurricane Katrina, there were howls of outrage – despite the fact that the refining infrastructure was badly damaged and it was self-evidently impossible to supply everyone at the customary lower price.But Harford is putting forward an explanation for the puzzle based on an idea by David Friedman. Harford writes,
The intuitive explanation, of course, is that we irrationally object to high prices even when the alternative is rationing, long queues, and uncertainty over whether we can buy what we really want.No one likes an explanation based on people being "irrational". This is where Friedman comes in. As Harford continues,
That is discomfiting for economists, but we might at least take solace in the idea that even though there is no immediate logic to a belief in the right price, there is at least an evolutionary logic. David Friedman – son of the late Milton Friedman, and a superb communicator of economics – has argued that our ancestors evolved in an environment where most transactions were one-on-one bargains. A hard-wired refusal to accept something other than the customary price would, in such a setting, be an advantage. Anyone who reacts to a price rise with irrational rage turns out to be a strong negotiator.But do we really have a "stubborn preference for a just price"? If we did wouldn't ticket touts be out of business? After all touts stay in business because we are willing to pay their (unjust?) prices, which seems to mean our preference for a just price can't be that stubborn. Those going to the tout can't have much of a "hard-wired refusal to accept something other than the customary price", by definition. Why is it that this "stubborn preference" prevents the promoter from raising his price but doesn't also prevent the tout from charging a higher price?
Our stubborn preference for a just price evolved in a setting that is no longer common; but evolution does not respond quickly, which may be why we still shriek with outrage at price hikes. It would also explain why ticket touts still make a living.
Also what sets the "customary or just price"? In the case of concert tickets wouldn't the price originally set by the promoter be the customary price? Isn't it in comparison to this price that the touts price would be called unjust? But why can't the promoter change this price? Note that different concerts by different performers have different prices, so there seems to be many just prices out there. Also different concert tours by the same performer have different ticket prices and these tours have different prices across countries. This may just be price discrimination but if promoters can discriminate then how seriously can we take the idea that there is a "customary or just price"? Which price is the just or customary one? And if under pricing doesn't maximise profits the promoter has a big incentive to increase the price.
I guess I must be missing something in the Harford argument.
Update: John Fountain has a entry on his blog on the reselling of tickets for rugby world 7's event in Wellington, see ticket scalping rugby world 7's: for or against?
9 comments:
You pose a very interesting question. I work for a "tout" as you call it- or a secondary ticket broker. My colleagues and I work with this question everyday and I agree with you to some extent. People do become outraged at the mark-up on our tickets. Yet we price based on the market. Usually, it it higher than what the promotor charges. Although, we do provide a service. Not many people want to wait in line outside of a box office several hours before a show goes on sale. Also, when buying from a box office, you don't really get to pick where you want to sit- you get tickets for whatever they have available. When customers call us, it is often days after an event has sold out, and they want to sit in the front rows, or at the least, be very close to the stage. We do the work and people pay us based on the market price- it is how most service businesses work. However, I believe the reason that promotors don't just increase the price is because the market changes drastically based on so many variables, which are often times, unexplainable. While we are successful with many shows- there are also shows that bomb out for no good reason- and then our prices drop accordingly. I can't tell you how many times a show or event was hyped up to be the biggest thing out there- and then the bottom drops and our prices end up being less than the face value of the ticket. The variables might include weather, day of the week, or time of the year. Unfortunately, at this time, there is no easy equation to predict the success (or lack thereof) of an event. So, based on that, perhaps the promotors underprice just to cover themselves.
Don't get me wrong, I have no problem with what you guys do and the service you provide. I do have a problem with people who want to stop you doing it, however. What interests me is why promotors price in such a way as to give you a market to work in.
One question I do have is what is the supply of tickets for the secondary ticket market? Do they come form the promotors?
I don't like the evolutionary explanation. If it is true that evolution selects in favour of behaviour that stamps out price manipulation, should it not also select in favour of acceptance of efficient price increases i.e. those caused by shortage?
Perhaps that is too fine a line for evolution to distinguish between, and, given an inability to distinguish, violence in response to price increases works out better on average than no violence.
Perhaps it is broader than that even, and violence as a response to a broader range of adverse economic events (e.g. famines, population growth) is selected for.
Matt
The non-evolutionary counter to this may be that if you did, for example, just kill the other guy no one in the future would want to trade with you on the obvious grounds that you may do the same thing again. So going too far may be self defeating.
Paul
Yes - but then if it is only the threat that is sufficient to prevent price increases, and that threat is credibly backed by a mutually understood hate for price increases, then murder need not actually occur for price increases to be prevented.
It still seems an odd explanation for me. Let's say there really is scarcity, and prices (as expressed in the ratio of exchange of goods in bartering, presumably) are not allowed to increase. Presumably that will stop the scarce good being traded entirely. The guy that had to spend twice as long finding meat will not be willing to give it away for the same amount of some other good.
Wouldn't selection favour genes which do not induce violence in response to price increases and thus permit prices to better reflect cost?
Note this would be true even when prices increase due to manipulation. The meat hunter living the high life by manipulating trade prices by feigning scarcity will soon find himself in competition with others seeking to similarly improve their own condition.
One way around this might be trasnactions costs. If negotiating a price on each trade is sufficiently costly, then a single constant price back by the threat of violence for deviating is then sensible. I wonder if the fact that many goods being traded were perishable produced a hold up problem in negotiations, particularly in small tribes. Selection might then work in favour of fixed prices backed by violence.
Readers interested in my explanation of the evolutionary basis for the belief in just prices, and some other examples of using evolutionary psychology to explain economic puzzles, will find a draft of the article webbed at:
http://www.daviddfriedman.com/Academic/econ_and_evol_psych/economics_and_evol_psych.html
A later draft was published as a chapter in a book.
I hope Friedman didn't read my comments, I feel like a dunce now.
It occurred to me that hold up should not be an issue when the game is repeated.
I will now have to go see what Friedman's insights on this are, I'm quite intrigued.
Matt
I see your point but at some point you have to make your threat credible ... but actually killing someone. And then not one else will trade with you.
I have done a very quick read of Friedman's article and while I think I see where he's going I still don't buy it. For the case we are talking about my basic problem is if we really have a "a hard-wired refusal to accept something other than the customary price" how do secondary ticket brokers stay in business? If we won't accept an increase in price from the promoter why will we pay a higher than customary price on the secondary market? Why doesn't the hard-wiring stop us from accepting the higher price from both the promoter and the ticket tout?
And if we will accept a higher price we are back to where are started, why doesn't the promoter raise his price?
Of course I could still be missing something in Harford/Friedman argument.
Paul- Sorry it took me so long to respond. Actually a great many of our tickets come from people who for one reason or another can't or don't want to see the show. It could be them also wanting in on any profit. But a lot of our inventory comes from regular fans. If someone buys tickets from Ticketmaster, they don't allow returns. If that person sells us thier tickets, they don't lose the money they originally spent on them.
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