Ticket Scalpers: Criminals or Agents of Efficiency?

Figure 1

Following nearly every major sports event and music concert there's an obligatory newspaper piece lamenting the damage done by ticket touts and scalpers. These individuals, it is contended, harm ordinary concertgoers and sports enthusiasts by taking advantage of the limited ticket supply to resell at inordinately high prices.

Laws regarding ticket resale vary around the world; in Hong Kong, the government places an outright ban on reselling a ticket at any price above its face value. Although such measures tend to have popular support, they are perhaps economically misguided.

Ticket reselling is an activity that allows the market to "clear"—that is, reach an equilibrium between supply and demand. Suppose, as in Figure 1, that the event organiser sets the ticket price at Ps. Then, the intersection between the demand curve and the price occurs at Qd. This intersection represents the quantity of tickets that consumers will demand at the original sale price. Demand outstrips supply, creating a loss of efficiency ("deadweight loss") as represented by area L.

It is generally not possible to increase the supply of tickets—though if a music concert is overbooked, it is sometimes the case that an additional performance is organised—so the only way for the market to clear is by adjusting the price of the tickets until the supply and demand curves intersect. This is where resellers come in. Resellers, sometimes in violation of the law, bring the market to equilibrium by selling tickets at the highest price possible—represented in this case by price level Pm. Thus, strictly speaking, economic efficiency is achieved: the tickets are allocated to those for whom they are most valuable, in a monetary sense.

The question that arises immediately then is, why aren't prices initially set at the market clearing point? Raising prices looks like a proverbial free lunch for an event organiser—they would sell the same number of tickets as before and just make more money! Ticket scalpers would be completely out of business. However, there are a couple theories regarding why prices are at "Ps" instead of "Pm".

First, the event organisers are faced with the problem of uncertain demand. In the real world, it is virtually impossible to accurately determine exactly how many Rugby Sevens tickets, for example, would be demanded at a given price. Lifting prices is thus a riskier proposition for event organisers than it may initially seem.

Second, event organisers, unlike ticket scalpers, have a greater concern for long term profits than short term profits. Let's take the band Maroon 5 as an example. Maroon 5 may be very confident that they would be able to sell out a concert even while doubling ticket prices, but they'd be loathe to damage their reputation by being perceived as a band that overcharges its fans. In the long run, the profit-maximising strategy may well be to broaden the fan base and cultivate loyalty. It is for a similar reason that many overbooked restaurants do not bump up prices significantly. They don't want to leave their customers with a bad taste in their mouths (no pun intended) by charging what may seem to be an unreasonable price. Ticket scalpers obviously have no such qualms about "reputation" as they aren't associated with the product they sell. They are purely concerned with short term profit. Clearly, scalpers play a perhaps necessary role in bringing the market to equilibrium.

That being said, this issue is more nuanced than a clear cut supply-demand analysis. It's hard to find concertgoers singing praise of the economic efficiency brought about by ticket scalpers. The common complaint is that scalpers hoover up the supply of tickets and then make "true fans" pay a higher price. This is demonstrably true. Although scalping promotes efficiency, it also leads to a loss of "consumer surplus." In this instance, a consumer's "surplus" is the difference between what he or she is willing to pay for a ticket—represented by the individual's location on the market demand curve—and the price of the ticket itself. If I was willing to pay $2,000 for a ticket that's being sold for $1,000, I receive $1,000 in "surplus." With scalpers in the market, however, that ticket may now be going for $1,500. Thus, my surplus goes down from $1,000 to $500. In Figure 1, the combined areas Cs and Cm represent total consumer surplus at the official price. When scalpers enter the market and the price reaches its equilibrium, surplus is reduced to the area Cm. Economic efficiency is achieved, but at the cost of consumer satisfaction.

There is also the important consideration of the tradeoff between economic efficiency and equality. This is a point often overlooked by those in support of a free market for tickets. As was outlined earlier, when the market clears those who have tickets are those for whom the monetary value of the tickets is greatest. This is efficient; it is not fair. A factory worker willing to spend a day's wages to buy a ticket to a football game ostensibly values the experience more than a businessman willing to spend twice that amount in absolute terms. Unfortunately for the factory worker, the market judges value on an absolute, not relative, scale. The businessman gets the ticket. Disallowing a secondary market in tickets is perhaps one way to avoid having the general public priced out of major sporting and musical events.

Finally, there is the issue of counterfeiting. With a secondary market in tickets, there is a strong incentive to peddle counterfeits and pocket a quick buck. These counterfeiters are obviously engaging in criminal activity and their actions play no productive economic role. Naturally, prohibiting the resale of tickets diminishes the problem of counterfeiting.

Dealing with the mismatch between supply and demand for tickets is a tough issue. If one wishes to maximise equality in ticket allocation, the best method may be a lottery system. Those who win the ticket lottery are assigned a non-tradable ticket with their name printed on it. This virtually eliminates the problem of counterfeiting and ensures that ticket allocation does not systematically favour the wealthy. On the other hand, this method creates a great deal of economic inefficiency by entirely cutting out the possibility of trade. A group of friends, for example, may find that half of them didn't win the lottery and thus have absolutely no way of attending the event together—even if they were willing to pay a premium to do so.

It is therefore unclear that an outright ban on ticket resales is the ideal policy, whichever way it is implemented. Bans do lead to considerable inefficiency, even if the issue of counterfeiting has been dealt with. A legal market for ticket reselling may be a better alternative. Such a setup would promote economic efficiency whilst protecting consumer interests and lowering prices by ensuring that there is an openly competitive market for second hand tickets. However, concerns about inequality do remain.

Ultimately, the controversy around ticket reselling is a great example of an issue with complex economic considerations and tradeoffs. As is sometimes the case, the straightforward textbook solution may not be the one that society would see as ideal.