Sean left an interesting comment on my earlier post which got me thinking: If Springsteen does not price discriminate ticket sales, the resale market will do it for him, charging high prices for rationed tickets and getting surplus from high willingness to pay consumers. So, even if Bruce wants to sell tickets for cheap to his fans, the fans get screwed by the scalpers. Then, Bruce should come up with some other way to help his blue collar fans. One way would be to price-discriminate like a profit-maximizer and then give refunds to loyal fans. Maybe, you can use your fan club to give refunds to members who attend your concert or something of that ilk. And fans might even prefer giving money to Bruce than to scalpers: after all they’re probably pirating all his albums and concerts are his main source of revenue!
So, the prevalence of the resale market is puzzling: why don’t bands, plays etc simply price optimally and eliminate the scalpers? I looked for some research on this and found a paper by Pascal Courty, “Some Economics of Ticket Resale“. His theory has two parts: (Part 1) Suppose some people only realize over time whether they are free to attend a concert while other diehard fans know immediately. At the time you set ticket prices, the late bloomers do not yet know their demand. If you price too high the diehard fans will not buy as they can’t afford it. The late-blooming consumers won’t buy as they’re not yet sure they can attend. So, the promoter prices low and diehard fans and scalpers buy tickets. As time goes buy the late bloomers who are free to attend the concert demand tickets and scalpers rip them off. (Part 2) Scalpers are always more flexible than promoters. If promoters attempt to enter the late-blooming market, scalpers can always undercut them.
And there is some empirical work too. Connolly and Krueger in Rockonomics present data on ticket pricing and on Krueger’s experience at a Springsteen concert.
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May 27, 2010 at 12:48 pm
Thorfinn
Becker has done a lot of work on this, mostly the context of restaurants, but still applies here.
The idea is that the utility I get from certain activities is dependent on how many other people are attending. The band experience is better when it is sold out.
In terms of pricing, this generates two equilibria. If you set prices too high, no one will come. So you are forced to set prices low so as to generate “buzz.” Markets will never clear here.
May 27, 2010 at 1:37 pm
sandeep
You can’t resell your restaurant seat; you can resell your Springsteen ticket.
May 27, 2010 at 11:11 pm
Mallesh Pai
We could also ask the artists for their thoughts. Here’s Trent Reznor of the Nine Inch Nails explaining why he lets this happen: http://forum.nin.com/bb/read.php?59,548515
May 28, 2010 at 9:12 am
Sean
Great link, Mallesh. Reznor’s stated thoughts are along the lines of what I expected. Acts know they are leaving money on the table, but it is too image-costly for many of them (especially a “blue collar” billionaire like Springstein) to reap the rents themselves. Tickets are underpriced, the act can claim to be in touch with “real” fans (knowing full well that the underpriced tickets are being fed directly or indirectly (through technical sophistication) to scalpers), and scalpers get to be the bad guys.
The Courty and Becker models applied to concert tickets don’t stack up to the stylized facts (for mega acts). Really, who can afford to pay $1750 for a ticket at t=2 but is unwilling to pay $98 at t=1 for the option to go in t=2? That doesn’t even address the fact that the ticket purchased for $98 can be re-sold for $1750, this is an unbelievable arbitrage opportunity for everyone who owns a credit card, there should be a billion people trying to buy Springstein tickets. Reznor’s point is that it actually is not believable at all, those $98 tickets aren’t attainable by the public in the first place, they are often sold directly to re-sellers and just made to look publicly available for the sake of appearances.
Sandeep’s point about artists designing mechanisms to distribute tickets to loyal fans is apparently on point. From the Reznor post, the artist basically negotiates with the venue/promoter a fixed price for the performance, then the promoter sells the tickets and pockets the difference (I’m sure the contract has a lot of details about what price the promoter can publicly charge, etc.). Reznor can negotiate to keep, say, the best 10% of seats, but that’s going to seriously hurt his fixed price for the performance. To use our Bon Jovi / Springstein example, the artist will have to pay $1750 each for the best seats and re-sell them for $98. I think we’ve been thinking all along that an artist pays a fixed cost to play the venue then pockets ticket sales. Instead, he is paid a fixed fee based on expected ticket sales. If artists are loss averse, fan loyalty distribution mechanisms are even more costly than Sandeep’s example implies.
Good stuff, great post and link.
May 28, 2010 at 9:45 am
Sean
Actually, I guess the artist is getting paid nearly the same whether primary market tickets are priced at $1750 or $98. The artist negotiates a fixed fee with the promoter. The promoter sells tickets directly to the public at market value, or publicly posts below-market price tickets but actually sells most of them to a scalper (which the promoter may actually own). The scalper sells at market and makes a little cream. I suppose if the artist wants it to look like his tickets are cheap, his fixed performance fee is dropped by the amount of cream paid to the scalper, plus the loss on any cheap tickets that do end up being sold in the primary market (there are probably some legal restrictions that require some batch to actually be sold on the primary market).
June 3, 2010 at 10:52 am
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