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Widespread scalping is a sign of poor revenue management by event organizers

Reselling of concert and event tickets at a price above their face value, also known as scalping, has been a recurring topic of discussion by the general public as well as among economists.

Several artists such as Adele have been fighting scalping by introducing personalized tickets, thus preventing their resale. However, preventing resale is an economically inefficient solution as there might be reasons for resale other than profit motives (for example, inability to attend an event as initially planned). It might also complicate entry to events and make it more difficult to buy a ticket as a present.

Undersupply and underpricing at the box office as causes of scalping

In economic terms, scalping is a signal that the demand for the tickets to an event at the price set by the event organizers exceeds the supply. Scalpers help find a higher equilibrium price in a situation that in the absence of scalping would have turned into plain deficit (unavailability) of tickets. Thus, the obvious general suggestion from an economist to artists and event organizers who want to eliminate scalping is simply to stop underpricing and undersupplying tickets (Perry). In other words, add additional shows or sell the tickets at a higher price corresponding to their market value in the first place and simply collect the additional revenue rather than allow scalpers to do it.

Event organizers have been acting upon some of that advice. In particular, it is not uncommon now for popular artists to plan their tours in such a way that a second show at a popular venue can be added on the day before or after the first day if the first show sells out quickly. This is akin to the practice by movie theaters to let a popular movie stay on the screens for longer and thereby satisfy the demand from moviegoers.

However, increasing supply is not always an option. A competitive sports game cannot be played a second time simply because there are more people willing to see it live than the venue can fit. Simply raising the ticket prices across the board is also not always an option. Consider, for example, a below average team hosting the top team in a major sports league. If the prices of all tickets were set purely according to market value, it might upset some die-hard regular fans who could not afford the price, but on whose support the team depends throughout the season.

Event managers can reconcile the different issues at stake, increase their revenue and limit scalping by using revenue management techniques such as price targeting. We discuss a simplified example below.

Economics of fixed capacity events

Imagine that the two of us were to give a seminar on price targeting in a 100-seat auditorium and faced the following demand curve: at a price of USD 100, only one person would be willing to attend whereas by lowering the price the quantity demanded would increase linearly and at a price of USD 1 we could get a hundred people, i.e., our seminar would be sold out. Obviously USD 100 is not what we are after. However, if we set the (single) price at USD 50, we could get 51 person to attend and collect USD 2,550 (see the graph below).

Having collected USD 2,550 we would still be much below the theoretical maximum revenue, though, as 1) those willing to pay more than USD 50 would enjoy their consumer surplus and 2) those who cannot afford USD 50 would stay away.

The theoretical maximum that we could collect by charging each attendee the maximum that they are able and willing to pay would be the area under the demand curve or

100 + 99 + 98 + … + 3 + 2 + 1 = USD 5,050

That would be almost twice as much as the USD 2,550 at a single price of USD 50.

In addition, if we just keep a single sales price of USD 50, we are inviting scalpers to collect some of the consumer surplus. Knowing the final demand curve, they could buy up tickets to our seminar at USD 50 and then resell them at USD 70, USD 80 or even USD 90 on the secondary market to those willing to listen to our seminar. Thus, we would forego some of our potential revenues to scalpers.

Now, in real life perfect price targeting is usually impossible. However, by setting, say, three different prices – a regular price of USD 50, then a price of USD 25 for our undergraduate students (here we might indeed introduce personalization of tickets so that they can’t resell to business people willing to pay three times as much) and a price of USD 75 for those who want to take a selfie with us after the seminar we could still collect considerably more revenue than USD 2,550, limit scalping and fill more seats than 50.

To be entirely fair to economic theory, we have to note that the selfie thing would probably tilt the top part of the demand curve at least slightly (to be entirely fair to ourselves – none of us looks like Brad Pitt). Similarly, not all seats at an event have the same value. A seat in the first rows at a concert is likely worth more than one in the far end of the venue. It is not a coincidence that we used the term “price targeting” rather than “price discrimination”. One reason is that the former sounds better. The other, more substantial reason is that by price targeting we mean not only price discrimination as in microeconomics, but also charging very different prices for somewhat different products.

Opportunities for event organizers

The economics of sports games or concerts is like our seminar example described above and revenue management techniques are being used more now. Some artists do fan club presales, which ensure availability of some of the tickets at popular venues to fan club members, before general onsale. Sports clubs offer hospitality or VIP packages by adding a separate reception, a pre-event meal, signed memorabilia, etc. and sell the package at a price several times the “plain” ticket price. While the main aim is to maximize revenue, having more expensive VIP packages available until shortly before the event puts a lid on what scalpers can charge for a regular ticket. VIP tickets are also usually personalized or at least require box office collection prior to the event.

However, event organizers could do more. One possibility would be for them to vary prices within the same category of tickets according to demand, in essence using a revenue management approach employed by airlines. For example, initially the price would go up every time a certain occupancy level is reached in each ticket category. If demand dried up, the price would be lowered again. If unsold tickets remained shortly before the event, they would be offered at lower “last minute” prices. Such a market could even still have room for ticket resellers, but they would become true providers of liquidity and take risk rather than enjoy a guaranteed profit on tickets obtained at face value.

More widespread use of the above techniques could be of benefit to all parties involved. Loyal long-time fans could enjoy attendance on more favorable terms than those who are looking for a one-off entertainment experience. Those who would like to obtain tickets to events at popular venues shortly before the event, could do it directly from the organizers at a price premium. And artists and sports clubs would sell out their events while at the same time earning more revenue.

Conclusion

Resale of event tickets is generally beneficial and some scalping is an unavoidable side effect of it. However, widespread scalping and market prices at several times the face value of tickets is a sign that the event organizers have failed to set the price level in line with demand and use appropriate price targeting techniques. As a result, a substantial part of the price paid by customers would end up with scalpers rather than the respective artist or sports team.

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