The Economics of Ticket Scalping

by James J. Atkinson University of Notre Dame 3 May 2004

Introduction

Ticket scalping is the resale of tickets in the secondary market. It exists at many sports and other entertainment events because under-pricing at the box office creates excess demand, thereby not allowing the market to clear. With box offices setting the prices of tickets artificially low, licensed ticket brokers and unlicensed on-site street scalpers emerge as the secondary sellers to clear the market. These ticket resellers purchase a lot of the tickets at the artificially low box office price and then meet the demands of those purchasers willing to pay higher prices for those same tickets. Figure 1 shows that ticket resellers are able to purchase the tickets at an artificially low price, PBO and then resell at the market-clearing price P*. Other times, the ticket resellers will buy from other ticket holders who for whatever reason are unable to use their tickets. These ticket resellers usually are able to mark up the price from the purchase price and turn a profit. For instance, a block of eight tickets for the opening of Star Wars: Episode I was resold for $600, far above the face value (Weber, 1999).

While some may claim that ticket scalping is unethical and immoral, even illegal in certain states and municipalities, it is simply a free-market transaction. Most economists avidly oppose laws that make ticket scalping illegal. Such regulations do not allow the market forces to reign.

This paper will explain the economics behind ticket selling and reselling. First, several explanations for the artificially low box office prices will be offered. The paper will then explore why ticket resellers are necessary and how they go about purchasing, repurchasing, and reselling tickets. Examples will be cited. Finally, methods of combating the secondary ticket market, including the use of the Internet to make the market more efficient, will be discussed.

Economic Puzzle: Why are ticket prices set artificially low?

Theory 1: The difficulty of selling out with uncertain demand

Paul Krugman (1999) puts forth three theories as to why box offices supplying the tickets typically sell at a price lower than the market-clearing price. The first theory deals with the image of the sports team or music artist. Most teams and artists feel that it is crucial to their image that their venue be sold out. After all, a sold-out venue lends value to attending. It makes attending more attractive to customers who were able to obtain tickets that others were not. Secondly, a sell-out crowd maximizes complementary revenues from parking and concessions. In order to be guaranteed a sell-out crowd, however, the box office has to price the tickets artificially low, since it is improbable that the ticket demand and, therefore, equilibrium price would be known.

Another reason to desire a sell-out crowd occurs in the National Football League. As Andrew T. Williams (1994) points out, the NFL’s blackout rule prevents local television broadcast of a game that is not sold out. Failing to sell out a game, therefore, has negative effects on television revenue and the ability for a team to widen the fan base (Williams, 1994, p. 505).

Pascal Courty (2003) claims that the market-clearing price is unknown because often times, not only are producers uncertain of demand, but consumers also are uncertain of their own demand, i.e. they are unaware of how much they value a ticket until just before they are about to use it. Ticket sales for the NCAA Men’s Basketball Tournament provide a perfect example of ticket demand uncertainty. Two third-round games and one fourth-round game took place at the Continental Airlines Arena in East Rutherford, N.J. on March 25 and 27 earlier this year. The four teams playing at this venue were unaware of their opportunity to play in East Rutherford until Sunday, March 14. Even then, they didn’t know they would advance to the third- and possibly fourth-round games until Saturday, March 20, when they won their second-round games. Tickets for the games in East Rutherford, however, went on sale months beforehand. Fans purchasing tickets when they initially went on sale had little idea as to which teams would be playing there, thus the true value of the tickets was completely unknown at the time of the initial sale. In fact, the value of the tickets for the fourth-round game on March 27 did not become apparent until March 25 when the third-round games determined the teams to play on the 27th. Scalpers eagerly awaited outside the arena on March 25 hoping to snatch up tickets from Wake Forest fans, who had just lost to St. Joseph’s. The scalpers were delighted by the fact that St. Joseph’s, which is located much closer to the tournament site than Wake Forest, had won the game. Certainly, St. Joseph’s would bring more fans, i.e. more demand, thus driving ticket prices upward (Wyatt, 2004).

James Swofford (1999) ties in risk aversion with demand uncertainty as being a supporting cause of Krugman’s first theory. He argues that the box office selling the tickets at an artificially low price is willing to trade profit for certainty. This low price level, however, leaves an opening for speculators (i.e. scalpers and brokers) who face less risk or are less risk averse than the producing firm. For instance, an individual ticket buyer may purchase tickets with the intention of actually consuming them. If the price were to increase enough, however, he would decide to sell them. A ticket office does not have this luxury though. If the producing firm sets the price too high, it may get stuck with too many tickets, more than it can possibly use or even give away (Swofford, 1999, p. 533).

Theory 2: Appealing to the common man

Krugman’s second theory is that it is an important social goal of the box offices that tickets be available to fans at moderate prices. This allows regular fans to attend concerts and sports events, as opposed to having a venue filled only with wealthy and perhaps less enthusiastic individuals who would be the only ones who could afford to be there. This creates “a situation where not only the rich and powerful receive all the tickets, [thereby generating] positive morale effects” (Happel and Jennings, 1995). Your typical diehard football fan generally is not the CEO of a Fortune 500 company, but rather a blue-collar factory worker. Appealing to this class by offering tickets at artificially low prices can serve to widen the fan base.

Theory 3: Differing profit maximization functions

The third Krugman theory deals with the fact that box offices and resellers have different profit maximization functions. Box offices always strive to maximize profit in the long run over the course of several events or seasons. Ticket resellers, however, have the luxury of being concerned only with maximizing profit in the short run on an event-by-event basis. Swofford breaks down the different profit functions into box offices’ and resellers’ differing cost functions and revenue functions. The ticket reseller’s cost function differs because it may have fewer costs due to lower information costs, lower transaction costs, or lower taxes (Swofford, 1999, p. 534). For instance, a ticket reseller who works a local market would likely be more knowledgeable about that particular market than would a national ticket supplier selling tickets for a concert tour. In other words, the scalper’s information costs are lower. Additionally, since ticket scalping is illegal in many places, the scalper is able to avoid the cost of taxes (Swofford, 1999, p. 535).

The revenue functions of a box office and a reseller differ “because the producer may be identified more with the product than the ticket scalper or arbitrager” (Swofford, 1999, p. 535). Therefore, the box office and the reseller are concerned with profit over different time frames. With the box office, the more consumer surplus and product satisfaction, the greater sales are in the future (Swofford, 1999, p. 536). The scalper, on the other hand, is not identified with the product like the original producer and therefore can maximize profit in the short run “without affecting the future profit opportunities from ticket scalping” (Swofford, 1999, p. 536). On-site ticket scalpers generally do not sell to regular customers, so they have no reputation to gain or lose by selling at certain prices. Additionally, Allan C. DeSerpa (1994) points out that the box office has to take additional revenues, such as concessions, into consideration when pricing the tickets.

How Ticket Resellers Benefit Box Offices

Zane Spindler (2003) adds one more theory to Krugman’s list. In response to Swofford’s article, Spindler argues that both scalpers and producers benefit from each other. In the title of his article, he likens the relationship to parasites serving their host. Spindler disagrees with Swofford’s claim that scalpers reduce consumer surplus without affecting the producing firm’s revenue: “The possibility of selling unwanted tickets would surely affect the initial demand for tickets per se when such a repurchase/resale feature is not officially provided” (Spindler, 2003, p. 695). According to Figure 2, box offices benefit from the additional demand for tickets that ticket scalpers provide. Instead of receiving revenue PL x QL (as it would if reselling were not allowed), the firm would now receive PM x QL, with some tickets going to regular consumers and others going to scalpers. The scalper benefits from this by purchasing the quantity QL – Q1 from the firm at price PM and then reselling at an average price of up to PH. The gross revenue collected by the scalper would then be (PH – PM) x (QL – Q1). Thus, according to Spindler, both the firm and the scalper benefit from the existence of each other.

Williams provides further support for Spindler’s theory. Williams argues that if NFL owners followed their own economic self-interests, they would vigorously oppose any laws that interfered with the reselling of tickets above face value. This is because ticket scalpers bring better information about the true ticket-clearing price for tickets. In other words, the monopolist box office firm learns more about the location of the demand curve of the ticket consumers (See Figure 3). According to his research, the presence of scalping in California has allowed the San Francisco 49ers to charge $1.95 more per ticket than if scalping had been outlawed. The additional revenue for the 49ers organization adds up to over $1 million per year (Williams, 1994, p. 507).

Ticket Resellers as Necessary Market-Clearing Agents

Ticket resellers typically are referred to either as brokers or scalpers. A ticket broker is a licensed reseller who usually operates out of an office, and depending on how large the firm is, may have several regular customers. Big brokers often times earn seven- and even eight-figure incomes (Teegardin, 1998). They act as the middlemen, buying from those who are willing to sell and selling to those who are willing to buy (at a marked-up price of course). Estimates of the number of ticket brokers in the nation range from 800 to over 1,000 and the industry is extremely fragmented and regionalized, with no single brokerage firm controlling even 1% of the market (Happel and Jennings, 2002, p. 449). TicketAmerica estimated that the primary ticket market brought in $7.2 billion in 1997 and that ticket brokers resold 10% of the primary market at an average of twice the face value, leading to an estimate of the secondary broker market valued at $1.4 billion for that same year (Happel and Jennings, 2002, p. 449).

The other ticket resellers are referred to as scalpers. The word “scalper” is commonly referred to an on-site reseller and there is a certain stigma associated with the word, particularly because of the nuisance effect they create on game-day, including blocking traffic, heckling ticket holders, and selling counterfeit tickets. Honest scalpers, however, perform a valuable service because they are on site in the hours leading up to the start of the event. They are the ones who close the market, a necessary function of any efficient market.

Many fans who are looking for tickets may not have the time to stand in line or call the box office during a ticket sale. Enter the resellers. Ticket brokers and scalpers get their share of tickets, sometimes in bulk, by paying people to stand in line or call the box office when tickets initially go on sale. Unfortunately, the aggressive ticket purchasing efforts by the resellers may take away the opportunities of some regular fans that may just want to purchase a ticket for the sake of consumption, rather than resale.

Besides having hired individuals clog the queues and phone lines, there likely also exists a fair amount of insider trading that occurs, i.e. ticket resellers who know someone at the box office could bypass the lines to obtain tickets. This practice, called “ice” involves a box office employee channeling the tickets to resellers for a fee. The ethics of such a practice are questionable to say the least, and in 2001 “ice” was changed from a misdemeanor to a felony in the state of New York (Happel and Jennings, 2002, p. 446). A report released by the Office of New York State Attorney General Eliot Spitzer in 1999 revealed that “the practice of paying and receiving ice is rampant.” This is due in part to the fact that box office employees typically are a “tightly knit group that includes … familial relationships” (Spitzer, 1999, p. 11).

How Resellers Make the Sale

After the resellers acquire the tickets from the box office, they have to find the channels in which to make the resale. Ticket brokers sell through their offices or Web sites days or even weeks before an event. These brokers are licensed to be resellers and acquire customers through placing ads in newspapers. Many of the brokers’ customers, as stated earlier, may be regulars.

Ticket scalpers, on the other hand, are not licensed nor do they have big offices or Web sites through which they can sell their tickets. Rather, they work both sides of the market on site during the day of the event, both buying and selling tickets up to the final minute before the event starts. Fans who come to the game with extra tickets can unload them on one of many ticket scalpers at the site who will then turn around and sell them at a higher price to those searching to buy tickets. Scalpers serve as the middlemen for those who want to sell tickets and those who want to buy tickets. Regular fans with extras and fans looking for extras usually are unable to meet without the middleman because the scalpers are much more aggressive and experienced than the general public and are able to snatch up the tickets before the two parties meet. Curry Kirkpatrick of Newsweek interviewed ticket scalpers at the 1993 Major League Baseball All-Star Game in Baltimore. They defended the legitimacy of their practice, with one stating: “We’re in the ultimate capitalist system. We’re not out to hammer anybody. If the Oriole season-ticket holders and the MLB people and the players kept all their tickets, we wouldn’t be here. But somebody wanted to forfeit their seats to make some bucks. We provide that service. We’re the middleman” (Kirkpatrick, 1993).

Even with ticket scalping allowed, the market remains somewhat inefficient because information asymmetry exists among buyers and sellers. The scalpers who are on site of the sports event on a daily basis know a lot more about the market than a fan who comes to unload his extra tickets only once in a while or a fan who comes to the event venue to purchase tickets one time.

The Internet, however, has made it easier for buyers and sellers to meet without the use of the ticket scalper middleman. In 2000, less than 4% of secondary broker market sales were transacted online (Happel and Jennings, 2002, p. 450). Buyers are not going to ticket broker Web sites too often. Instead, Internet auction sites, most notably eBay, allow sellers and buyers to meet having to confront a middleman. And the business is growing at a fast rate: From July 2000 to March 2001, eBay’s sports tickets auctions grew 200% (Happel and Jennings, 2002, p. 451). Reselling tickets on these Internet auctions sites, however, can be risky for certain season ticket holders. Many sports organizations prohibit their season ticket holders from reselling their tickets for much above the printed face value. Severe repercussions follow such breaches of this agreement. Notre Dame Sports Information Director John Heisler said that 1,200 football tickets attempting to be illegally resold on the Internet were confiscated by the university in 2003. Often times, these tickets are traced back to the original owner whose ticket-holding privileges can be revoked for the following season.

Buyers at Internet auctions sites generally will find prices to be lower as the time to the start of the event approaches. Per Figure 4, the price of tickets being resold declines significantly in the hours and minutes leading up to game time. This occurs for two reasons. The first reason is that buyers pay a premium to comfortably secure a ticket well before the event. If a Michigan football fan from Ann Arbor, Michigan is planning on traveling all the way to Pasadena, California for the Rose Bowl Game, he had better make sure he has tickets to the game before spending so much money on airfare and hotel reservations. The second reason for declining prices is that as the event time comes nearer, ticket scalpers become more and more anxious to sell because an unused ticket after the event is nearly worthless. For the 2004 Rose Bowl Game, for instance, a pair of tickets selling on eBay two weeks prior to the game could not be purchased for less than $800, even if they were end zone seats. Often times, pairs of tickets for preferred seats were going for over $1,000. Minutes prior to kickoff, however, with plenty of scalpers still holding tickets, one particular pair of tickets was sold to the author of this paper for only $300, close to the original face value. Note that the ticket price never reaches zero, because even unused tickets to certain events, such as the Rose Bowl, have some value to collectors after the event.

Combating the Secondary Market: Anti-Scalping Regulations

Ticket scalping has been viewed by many to be unethical because it makes the real fans pay a higher price for tickets than the stated “face value” printed by the box office. Ticket scalpers, therefore, cut into the consumer surplus of the consumers. This brings up a controversial subject: Should ticket scalping be illegal? Currently, 31 states and the District of Columbia have anti-scalping regulations on the books. Economists, however, typically are opposed to such laws because they create market inefficiencies. As stated earlier, ticket scalping exists as a necessary mechanism that allows the market to clear. Without ticket scalping, demand would continue to exceed supply, thus creating an inefficient market.

The city of Phoenix has taken a different approach to ticket scalping regulation. Instead of outlawing it, they are encouraging it. Of course, certain restrictions apply. The city adopted an ordinance in 1995 that set up a specially designated area for ticket scalpers across the street from America West Arena, where the Suns of the National Basketball Association and the Coyotes of the National Hockey League play. Scalping in this area was declared perfectly legal, but scalping anywhere else was prohibited. This law has benefited ticket buyers by leveling the playing field significantly. With all the ticket scalpers forced to compete with each other in one centralized area, information asymmetry has been cut down dramatically. It is much easier now for buyers to gather information if all of the transactions are centralized. Furthermore, the nuisance effect of scalpers has been eliminated. No longer are scalpers able to heckle fans on their way to the game nor are they able to block traffic. Additionally, the law has made it much easier for police to patrol the area in which the scalpers work, which has most likely all but eliminated the amount of counterfeit tickets.

Alternative Ways of Combating the Secondary Market

The old adage, “If you can’t beat ‘em, join ‘em,” applies well to the relationship between ticket resellers and box offices. Because anti-scalping regulations do not always help crack down on the amount of reselling that occurs, box offices have begun to engage in the resale market themselves. With Internet technology and the increasing use of electronic tickets (e-tickets), this is becoming easier and more prevalent. E-tickets are not paper tickets that the box office physically sends to the purchaser. Instead, an e-ticket is e-mailed to the purchaser, who is then able to print it or e-mail it to a friend who may use it. The printed e-ticket contains a unique barcode that is scanned upon entry to the event. Once it is scanned, the ticket is no longer useable.

The San Francisco Giants of the MLB engage in reselling e-tickets through the organization’s “Double Play Window.” This allows ticket holders who are unable to use single game seats to resell their e-tickets through the Giants’ Web site. Once the e-ticket is sold, the original bar code is voided. Buyers benefit by being assured of the authenticity of their tickets. The Giants benefit by making a profit on the resale, receiving a 10% fee from both the seller and the buyer, getting revenues that would otherwise go to scalpers and brokers (Happel and Jennings, 2002, p. 451). The Columbus Blue Jackets of the NHL have a similar marketplace set up for their season ticket holders on TicketMaster. As Nobel prize-winning economist Gary Becker has said, “The use of the Internet is a way of making a market more perfect” (Agwin, 2002).

A Futures Market for Ticket Resale

Stephen K. Happel and Marianne M. Jennings (2002) have written a journal article that proposes the creation of a nationally organized futures market for major events tickets. The market for ticket resale today is very inefficient and complicated, with the great deal of fragmentation and information asymmetry that exists. Happel and Jennings (2002) actually argue that the fact that a futures market for tickets has not already been organized is a market failure.

This so-called futures market would operate similarly to a stock market. The tickets, which are simply bearer instruments, would be viewed as call options: “Like a call option, the holder has the right, but not the obligation, to occupy (call in) a certain seat over a certain period of time” (Happel and Jennings, 2002, p. 444). And since these tickets traded today basically are nothing more than call options, then Happel and Jennings (2002) argue “that such bearer instruments of value could be exchanged, just like stock options, in a nationally organized futures market” (p. 444). This would allow fans the opportunity to wait until the day of the game to realize the true value of the tickets. They could then decide whether or not to exercise the call option.

One major obstacle to creating this futures market is the difference in laws from state to state. Establishing uniform regulations across the nation would be difficult since 31 states and the District of Columbia each have different laws regulating ticket reselling. Additionally, within some of the non-regulated states are municipalities with ordinances restricting the resale of tickets in some manner. Furthermore, as mentioned earlier, the ticket brokerage industry is extremely fragmented. Happel and Jennings (2002) admit: “Trying to organize the fiercely independent group of ticket brokers is like herding cats” (p. 450).

Happel and Jennings (2002) conclude their journal article with five explanations for why this market does not exist (p. 459). The first two are general observations. Firstly, stock options are homogenous whereas tickets are not. Certain seats in the venue should have greater values than others. Secondly, the market may not be deep enough, as it is likely very few tickets would be traded on a day-to-day basis. The third explanation comes from the point of view of the producer, who aims to sell not only tickets but also complimentary concessions at the venue, as DeSerpa (1994) points out. An efficient futures market would likely upset the pricing balance that owners seek to achieve between ticket prices and anticipated complementary sales. Tickets would resell for a higher price but the consumers of these resold tickets would not be willing to purchase any souvenirs or food at the concession stands, having spent so much on admission in the first place. The fourth explanation deals with the broker’s point of view. Basically, a futures market would end the broker industry as we know it. No longer would customers depend on brokers and street scalpers to secure seats to special events. As noted earlier, ticket brokers and scalpers are already being squeezed out a little by the growing usage of e-tickets and Internet auction sites. The fifth and final explanation comes from the consumer’s point of view. Some consumer rights activists would certainly try to blow the whistle on what they would perceive as secondary market price gouging that would allow only the wealthy to attend special sports events. Surely, there should be some sort of blue-collar aura to any sporting event.

Conclusion

Dan Seligman of Forbes wrote at the end of 1999 that having laws against ticket scalping was in the top ten dumbest ideas of the century. Still, many feel that ticket scalping is an evil that can be prohibited. This is an ignorant position. As long as box offices continue with the goals at which they are currently aiming, there will always be ticket scalping, illegal or not. Of course, practices such as “ice” should certainly be outlawed and severely punished, as this is akin to illegal and unfair insider trading within the stock market. But as long as ticket scalpers provide legal means for ticket holders to buy and sell tickets, they are benefiting most consumers and box offices.

Figure 1. Tickets sold at the box office often times are priced too low. While P* is the market-clearing price, the box office in this example sells at PBO. Therefore, there is an excess demand of tickets, which effects a secondary market.

Figure 2. Spindler’s graphical analysis of how the scalper parasite benefits its box office host. The true value of the tickets lies along the MARGINAL VALUE curve, but scalpers, intent on securing tickets to make a profit, drive the demand for tickets up to a joint demand curve, DJ, thereby benefiting the box office, which is now able to sell the same quantity at PM instead of PL. Scalpers purchase quantity QL – Q1 at PM and sell the same quantity at PH along the AVERAGE VALUE curve. Therefore, both scalpers and the box office benefit from each other.

Figure 3. Sports teams, such as those in the National Football League follow a monopolist model. The problem for such suppliers, however, is that they do not know where their consumers’ demand curve lies.

Figure 4. The price of tickets in the secondary market decreases as the time of the event draws nearer. The price of the ticket never reaches zero because even a ticket stub has value to some after the event is over.

Spitzer, E. (1999). Why Can’t I Get Tickets? Report on Ticket Distribution Practices. May 27, 1999. New York, NY: State of New York’s Bureau of Investor Protection and Securities. Retrieved January 27, 2004 from http://www.oag.state.ny.us/press/reports/scalping/full_text.html.