Is Ticket Scalping Bad?

Happy Fourth of July! Here’s a microeconomics entry to celebrate the day:

Yesterday one of my friends commented, “Scalpers are obnoxious and I hate them,” and it really got me thinking… are they? The more I thought about it, the more I realized that ticket scalping isn’t a result of market failure – it’s a organic example of market correction. Here’s what I’m thinking: in a perfect market-clearing situation, every show sells out and everyone who wanted to see the event gets to go. But what happens when way more people want to go, but there are only so many seats? This:

Here’s what’s going on in this graph: D1 is a situation where the demand at face value perfectly fits the amount of people who want to see the show for that price. D2 is a situation where more people want to see the show at face value than there are tickets. D3, of course, is the the Mighty Ducks. Because the amount of tickets is absolute (the 9:30 Club can’t double in size for a popular show), the tickets become scarce when more people are willing to buy them than can fit.

Reselling the tickets at a higher price lowers the demand, narrowing the pool of customers until it equals the maximum number of attendees.

Shouldn’t that money go to the concert venue or the performer?

Well… if they could forecast the market more accurately, they could perfectly price the tickets. Keep in mind that the scalper is absorbing risks – if the show is less popular than he expected, he has to take a loss. Not to mention, buying and reselling tickets is work.

My friend said, “The price on the website is the price I want to pay, and if a scalper is charging three time that, that blows.” If I’m paying $50 for a ticket that says $35, I’m getting ripped off, right? Not really, the venue determined their operating costs to be $35. For $35, everyone gets paid (the cleaning crews, the performer, the electricity bill, etc.). As a patron, you pay all that amount and now your paying $15 for the option to attend. The scalper is, in essence, providing you with the opportunity that you might not have had. “I’ve missed a lot of concerts because of this. And I’m not going to pay anything over ticket price. I’m not going to pay $100 when I’m supposed to pay $15.” My good friend is making several errors here. First of all, what the price is “supposed” to be is actually the venue taking a calculated risk to charge an amount that they think will maximize their utility. Venues will probably err on the side of undercharging you if they risk losing revenue for not selling out. Secondly, yes, you were willing to see the concert (about $15 worth), but other people were more willing to see the concert. Most importantly, by externalizing the clearing price, you avoid having to ask yourself the difficult question: how much am I really willing to lose to see this show?

In some situations, the market can clear without increasing the cash price. This would occur if there was some other forfeit. For example, standing in line. By law, all publicly broadcasted shows, like Saturday Night Live, have to be free to the audience. The way the market widdles down the number of possible attendees is to reward those who are willing to stand in line the longest. Voila, market clearing. This was probably more common in the days before you could buy tickets over the phone or online. The problem now (and the reason we need scalpers) is that overloaded phone lines and maxed-out website bandwidth essentially distribute the tickets by lottery. I remember once I tried to buy a ticket for a Dispatch show, which were to go on sale at 10:00am on a particular day. I went to the website in advance, and hit refresh at exactly 10:00am, and they were sold out. Some folks hit refresh and were able to buy the tickets, but they probably didn’t do anything differently, they just got lucky. Scalpers correct for luck.

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