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Is Ticket Scalping Bad? Part 2

Posted in Behavioral Economics, Business, Economics, Entrepreneurship, Music on July 12, 2010 by sicsempertyrannosaurusrex

So, I was told that my last entry is a little bland. Looking back over it, I suppose that’s true, but I still think it is interesting. So what do you do when your audience gets bored with your subject matter? You beat that dead horse until the sky falls down.
I want to explain, graphically, one more aspect of buying a scarce good (before I propose what I think is a better way to distribute concert tickets). Whether you are standing in line for a free show, or paying a premium for seats at an expensive venue, you are forfeiting capital (time, money, and energy). How much you are willing to forfeit is based on tons of stuff – too many things to address (how much you have, what day of the week it is on, how many times you’ve seen them before, what your friends are doing that night), blah blah blah. But essentially, it’s how bad you want to see she show.
Here’s where problems arise: if you would pay $37 to see, let’s say, Julian Casablancas, and tickets go on sale for $25, you might not get one because they are scarce. So wouldn’t it be better if the ticket went on sale at your maximum? That would be better than missing the concert, but not as good as seeing the concert for less than your maximum. The following is a perfect distribution of tickets:

Another thing worth pointing out is that your maximum forfeit is only your maximum – you would probably prefer to pay much less. That’s where feelings get hurt, and probably why my friend gets mad at scalpers. So when you look at the above chart, these are only potential customers’ maxima (ie.. everyone would pay $10 to see The Beatles, but the $10 line would only measure those that would, at most, pay $10 to see The Beatles).
So here is my proposal. This strategy would maximize the total revenue of the show, almost guarantee that every show is sold out, and ensure that everyone at least had the chance to buy a ticket. I would like to see a theater distribute tickets in the following way: On the first day, tickets go on sale for an exorbitant price that no one would pay, then they drop a little everyday until they run out, or the tickets reach a price that only covers the marginal cost.

This would be the perfect real world example of first degree price discrimination – maximizing the revenue by turning consumer surplus into revenue. It’s entirely efficient with no deadweight loss. The ‘problem’ with this, if there is one, is that you, the consumer, want to keep as much of your surplus (as far below your reservation price) as possible – you would have to balance your ticket price with the risk of missing the show, not to mention opportunity cost (what other show could you see for this price?).

I’m interested to hear if any of you have objections to this model.

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Is Ticket Scalping Bad?

Posted in Behavioral Economics, Business, Economics, Entrepreneurship, Music on July 4, 2010 by sicsempertyrannosaurusrex

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.

Building a Brand

Posted in Business, Entrepreneurship, Wine on July 2, 2010 by sicsempertyrannosaurusrex

http://www.youtube.com/watch?v=EhqZ0RU95d4

I suppose it is worth mentioning another inspiration for this blog, a Web 2.0 Expo speech by Gary Vaynerchuk.

Vaynerchuk discusses 1) doing what you love; and 2) the importance of building a brand. Time and effort put into building your brand is never wasted, because no one can take it away, and it’s vital to marketing yourself online.

I always say: legacy is greater than currency. Has everyone completely grasped that your great great great grandchildren are going to watch and see everything you’ve ever done? I think about that every single day. – Gary Vaynerchuk

I’ve never been a big oenophile, but lately wine has been growing on me. I guess one thing that’s always bothered me about wine is that it is so often about conspicuous consumption, and we all know that just because something’s expensive, doesn’t mean it’s good. But wine can be great, and it’s always about context – which is why it’s important that I mention his blog. Winelibrarytv is a fascinating webshow that does away with the affectations of traditional wine reviews, and is mostly about a New Jersey guy that just likes wine. It’s entertaining, too – in one episode, for example, he pairs wine with cereal.

Analysis Paralysis

Posted in Antipatterns, Behavioral Economics on June 28, 2010 by sicsempertyrannosaurusrex

I think an appropriate topic for the first entry to this blog is Analysis Paralysis – it is both a fascinating phenomenon, and a rhyming one:

The term “analysis paralysis”… refers to over-analyzing… a situation, so that a decision or action is never taken, in effect paralyzing the outcome. A decision can be treated as over-complicated, with too many detailed options, so that a choice is never made, rather than try something and change if a major problem arises. A person might be seeking the optimal or “perfect” solution upfront, and fear making any decision which could lead to erroneous results, when on the way to a better solution.

Wikipedia

The term comes from the world of software development, but has a much longer history, and can be applied to most any field, such as ‘choking’ in sports. This may be an explanation for why so many of my peers, myself included, as recent graduates, haven’t chosen a career yet. Your graduation speaker may have said you can do anything you want, but that is way too many options (especially combined with the reality that anything you want probably isn’t hiring right now). Should I work in sales, insurance, real estate, finance, analysis, energy? Who knows?

With that as our problem, what’s the solution? As usual, one can turn to the Marine Corps for results. The following is from David Freedman’s book, Corps Business: the 30 Management Principles of the U.S. Marines:

Principle No. 1: Aim for the 70-percent solution. It’s better to decide quickly on an imperfect plan than to roll out a perfect plan when it’s too late. (New York: HarperBusiness, 2000. Print.)

I think it’s interesting to point out that this is principle no. 1. Although analysis paralysis can be annoying during a game of Settlers of Catan, it can be deadly for a commanding officer to stall too long. Applied to business, the same error could also have huge costs. Perhaps we don’t realize exactly how big of a problem analysis paralysis can be in terms of opportunity cost, because it would be a very difficult thing to measure in terms of the macro-economy. So how about we all just agree to make more 70-percent solutions?

Introduction

Posted in Technical Stuff on June 28, 2010 by sicsempertyrannosaurusrex

Welcome to Sic Semper Tyrannosaurus Rex – a blog. The purpose of this blog is to create a place to analytically explore and intelligently discuss many different topics. This particular blog was inspired by several other blogs, notably Whiskey and Car Keys and You Are Not So Smart as well as many long e-mail threads and private blogs, which might be appreciated by a wider public. The blog might soon be expanded to more contributors, based on feedback and interest. That being said, I hope that readers and visitors will enjoy the content and give feedback.

The following is a list of topics that might be covered:

Art
Behavioral Economics
Book Reviews
Comedy
Culture
Education
Evolutionary Biology
Finance
Geopolitics
libertarianism
Music, Movies and Television
Product Reviews
Rhetoric
Schooling

…and other things that I think are funny or interesting.