Monday, July 21, 2008

Why do we still have scalping laws?

Each year tickets for the Iowa-Iowa State football game go on sale and are snapped up lighting fast. What is a devoted Iowa football fan to do to get in to see their beloved Hawkeyes? One is to buy tickets from people selling outside of Kinnick Stadium - or to find someone willing to re-sell tickets online such as StubHub's Iowa football ticket market. In some states, reselling tickets (also known as scalping) is illegal. Does this make economic sense? Let's delve into the economics of the live event ticket market.

What goes into putting on a live event? You need three things: one, you need performers such as a music artist or a sporting event; second you need a venue to host the live event; and third you need some spectators to buy tickets to see the live event. Of course there are a multitude of other things that are needed, such as security and concessions, but here I am really only interested in focusing on the live event market.

For over 15 years, Ticketmaster has been the dominant firm in the live event market because they have locked up the most scarce resource - the venues. This is a very savy and profitable business model and has allowed Ticketmaster to be the dominant firm in the live event market since they have locked up the majority of venues here in the United States.

Let's think about the transaction for live events. Ticketmaster signs venues, such as Giants Stadium or the Rose Bowl to be the provider of selling live events for a price to each venue, and in turn contracts with artists and sports teams to sell tickets so spectators can view these live events. The venues - Giants Stadium - receive sales revenues from Ticketmaster which in turn is a cost to Ticketmaster. Live event artists receive sales revenue form Ticketmaster which again is a cost to Ticketmaster. (Ticketmaster passes some of its venue costs to performers). Ticketmaster earns sales revenue by selling tickets to spectators.

The market for live events has problems. Tickets for live events are typically either overpriced or underpriced. Ticketmaster Chairmen has said the industry "... prices its product worse than anybody else." When tickets are overpriced, tickets go unsold. In fact the concert industry estimates about 45% of all tickets are actually sold. When tickets are underpriced, ticket resales occur much to the chagrin of concert promoters - Ticketmaster - and performers - Tim McGraw and Faith Hill.

Additionally from 2004 to 2005, the average ticket price for a top 100 grossing live event increased by 9% and the number of tickets sold decreased by 7% - which is the law of demand. Also we can conclude that live event spectators are price inelastic - meaning that they are rather insensitive to changes in prices. This means that raising ticket prices will increase revenue - so concert promoters are leaving money on the table. Like I said, the market for live events has problems.

Compounding the problem are scalping (selling tickets for more than face value) laws. Scalping laws act as a price ceiling on the face value of a ticket. These laws only affect live events in which spectators cannot buy existing tickets - so they really affect only a small percentage of overall live event ticket sales. Stubhub (now owned by Ebay) has been at the forefront of overturning scalping and allowing markets to price tickets more efficiently. Craig Depken - a sports economist - has researched scalping laws and has shown that scalping laws actually increased ticket prices for baseball and football.

Stubhub (a secondary live event ticket reseller) benefits season ticket holders for live events that a season ticket holder cannot attend or find someone to purchase the ticket. With Stubhub - and similar vendors - season ticket holders can put single game/theater tickets up for sale and recoup some of the value from the tickets they would not have used. The secondary market may increase the amount of season ticket buyers, due to the lower opportunity cost of any unused season tickets. This could also benefit performers and venues if the resale option to season ticket holders increases the number of season tickets sold or at least reduces the attrition rate for season tickets. If performers/venues make money from concessions sales - having more people at the live event will mean more money in their pockets. You can't sell food or drinks to fans who don't show up!

In my research on NFL ticket prices I was able to show that each additional person in attendance at an NFL game increased concessions sales to NFL clubs by about $5 in 1995 prices. Overall, marginal non-ticket attendance revenues increased by about $37 in 1995 prices over the 1995 to 1999 seasons. Hence artists/sports teams benefit financially with secondary live event ticket markets. Additionally, artists/sports teams can offer these services on their website. My beloved Philadephia Flyers have a ticket auction on their (or now the NHL's) website.

Yet not everyone is happy. Ticketmaster only offers secondary live event ticket market services when it has a resale contract with the artist, team or venue. Thus for some live events, Ticketmaster is excluded from re-selling tickets that Stubhub is not. Ticketmaster may not be happy that some live events are being resold, but really this is a pricing problem that Ticketmaster needs to manage better. If Ticketmaster is interested in reducing live event ticket sales, Ticketmaster could set up an auction for tickets - much like priceline or eBay - and sell tickets to those who are willing to pay the most. This would significantly reduce re-selling; or Ticketmaster could lobby the government to enforce laws that reduce competition.

While setting up an on-line auction should greatly reduce reselling, will it be more profitable? Yes! Comparing the two pricing schemes, spectators willing to pay the most will add to the on-line sellers revenue more than for a uniform price in a certain section of seats. This is how airlines price, and while we might not like it - airlines make more revenues using this type of yield management pricing policy than an across the board pricing policy.

UPDATE 8/7/2008: The NFL and TicketMaster have created NFL Ticket Exchange - a secondary ticket market. Technology and profit-maximizing incentives are making scalping a dinosaur.

1 comment:

Ben said...

At some point I'll come back and try to understand your core argument. For now I'm too distracted by the way you've used the "facts" to focus on what you're arguing.

When you say that "Ticketmaster passes some of its venue 'costs' to performers" what you really mean is that, to keep artists from complaining about Ticketmaster's kickbacks to venues TM is now sharing some of the kickback revenue with some artists.

You note how unit ticket sales declined 7% in the face of a 9% increase in ticket price and then state that live event spectators are price inelastic. First, you mean that the *market* for live event tickets is price inelastic. Second the decline in the face of higher prices means the market is elastic - NOT inelastic. Third, these market data relate only to the Top 100 *concert tours* - not "the top 100 grossing live events" as you state. Even just within the live music industry the Top 100 tours represents only the tip of the iceberg in the live music industry. So the data you are misusing has nothing whatsoever to do with live sporting events which is where you focus the end of your post.

So you use your own research on the NFL to show that using auctions (rather than uniform pricing) to sell tickets will increase revenue due to your projection of greater season ticket sales. That may be, but leave the live music industry out of the argument. Season tickets don't apply.

Meantime, the WSJ article to which you link shows that Ticketmaster hopes to earn the premiums that companies like StubHub currently enjoy because they believe the average ticket price will rise. That would be true - but ONLY if concerts are booked in smaller venues. In this way, those with lots of disposable income bid the average ticket price way up while the smaller venue size produces greater yield (less empty seats).

This is where promoters are going anyway - the dismal 45% average yield they are experiencing points to booking smaller venues. So they feel they need to make more per ticket sold. As long as promoters derive some benefit from the higher average ticket price (from auctions), they will go in lock step with Ticketmaster.

Who suffers from this set of changes? The average music fan who can't afford to outbid the well-to-do in auctions for seats at smaller venues.

Will "the industry" make more? Maybe. Is it healthy for the live music market long term? I don't think so. The NFL? I have no earthly idea.

And now there's LiveNation which is beginning to truly compete with Ticketmaster but which probably won't bring the "convenience" fees and parking charges down as it is not in their interest to do so. But they own lots of key venues - no need for legally questionable kickbacks to venues if you already own them...and now they even "own" a number of artists (Madonna, Jay Z, etc). I don't think you can really address the topic of auctions without including LiveNation's rising presence.