Wednesday, March 18, 2009

Economics of Scalping: Trent Reznor edition

Economists have for some time been trying to figure out why concerts are priced below market clearing. Surely the artist does better by having fans allocate scarce supply by willingness to pay rather than by willingness to queue. The scalper profits by the arrangement rather than the artist, venue or promoter: why not reallocate the surplus back up the chain by charging market-clearing prices? Some candidate explanations, and rebuttals:
  • Queuing generates news stories the publicity value of which outweighs revenues forgone
    • But why not achieve the same outcome by pricing only half of the venue below clearing and have premium seats sold at market clearing prices? Is it really plausible that there's more press from queuing than from stories about sales of $1000 tickets?

  • Queuing sorts fans by fandom rather than by willingness to pay. This has benefits for the artist by increasing the average attendee's willingness to pay for complementary higher margin goods like t-shirts and posters, by ensuring that the mosh pit is filled with the most enthusiastic fans and thereby improving the concert experience for everyone.
    • But this could be achieved still by segmenting the venue; it doesn't explain why concerts without mosh pits (or active floor seating) are priced below clearing. Steve Landsburg likes the t-shirt explanation, but it's unclear to me why this predicts overall queuing rather than queuing for the floor seats and market-clearing prices for the rest.
  • Contractual arrangements between artist and venue give the artist stronger incentives to promote sale of ancillary goods than to maximize profits over both ticket sales and t-shirt sales; see discussion of sorting by fandom, above.
    • Then why don't they write better contracts?

Trent Reznor, the genius behind Nine Inch Nails, provides some insight. In short, scalping could be stopped immediately, without price changes, if concert promoters or venues wanted to stop it: simply print names on tickets and check against photo ID at the door. Why don't they do it? Let's turn it over to Trent.

The ticketing marketplace for rock concerts shows a real lack of sophistication, meaning this: the true market value of some tickets for some concerts is much higher than what the act wants to be perceived as charging. For example, there are some people who would be willing to pay $1,000 and up to be in the best seats for various shows, but MOST acts in the rock / pop world don't want to come off as greedy pricks asking that much, even though the market says its value is that high. The acts know this, the venue knows this, the promoters know this, the ticketing company knows this and the scalpers really know this. So...

The venue, the promoter, the ticketing agency and often the artist camp (artist, management and agent) take tickets from the pool of available seats and feed them directly to the re-seller (which from this point on will be referred to by their true name: SCALPER). I am not saying every one of the above entities all do this, nor am I saying they do it for all shows but this is a very common practice that happens more often than not. There is money to be made and they feel they should participate in it. There are a number of scams they employ to pull this off which is beyond the scope of this note.

In short, the ticketing agents have already made a deal with the scalpers to split the surplus without appearing like jerks by having high posted ticket prices. As Eric Cartman would say, it's like having your cake, and eating it too.
What's NIN done about it? Again, over to Reznor:

NIN gets 10% of the available seats for our own pre-sale. We won a tough (and I mean TOUGH) battle to get the best seats. We require you to sign up at our site (for free) to get tickets. We limit the amount you can buy, we print your name on the tickets and we have our own person let you in a separate entrance where we check your ID to match the ticket. We charge you a surcharge that has been less than TicketMaster's or Live Nation's in all cases so far to pay for the costs of doing this - it's not a profit center for us. We have essentially stopped scalping by doing these things - because we want true fans to be able to get great seats and not get ripped off by these parasites.

I assure you nobody in the NIN camp supplies or supports the practice of supplying tickets to these re-sellers because it's not something we morally feel is the right thing to do. We are leaving money on the table here but it's not always about money.
Being completely honest, it IS something I've had to consider. If people are willing to pay a lot of money to sit up front AND ARE GOING TO ANYWAY thanks to the rigged system, why let that money go into the hands of the scalpers? I'm the one busting my ass up there every night. The conclusion really came down to it not feeling like the right thing to do - simple as that.

That story's consistent with the fandom explanations above. I can buy that the artist would want the most enthusiastic fans up at the front rather than the boring folks who can afford to pay $1000 per ticket. Giving an economics lecture is a lot worse if the students up front seem less interested than you think they ought to be, and I'd fully expect that the effect is greater for musicians. Why shouldn't they trade off some monetary income for being able to put on a show that's more fun for them? I certainly put non-trivial weight on how fun a given lecture will be for me to deliver; I wouldn't expect anyone else to do otherwise.

Reznor concludes:
My guess as to what will eventually happen if / when Live Nation and TicketMaster merges is that they'll move to an auction or market-based pricing scheme - which will simply mean it will cost a lot more to get a good seat for a hot show. They will simply BECOME the scalper, eliminating them from the mix.

Nothing's going to change until the ticketing entity gets serious about stopping the problem - which of course they don't see as a problem. The ultimate way to hurt scalpers is to not support them. Leave them holding the merchandise. If this subject interests you, check out the following links. Don't buy from scalpers, and be suspect of artists singing the praises of the Live Nation / TicketMaster merger. What's in it for them?


I'm a bit confused at this point. If the prior argument was that collusion between the ticketing agencies and the scalpers allowed an arrangement maintaining the facade of "fan friendly pricing" while allowing for extraction of rents, why would a merger between the venues and the ticketing agents allow that solution to become explicit with true market-clearing pricing? If the current constraint is wanting to maintain the veneer of low prices, what about the merger removes that constraint?

I'd argue instead that we're just seeing a trend towards market clearing prices because prior arrangements where concerts effectively served as loss-leaders for albums has had to change with file-sharing; now, the CD tracks are the loss-leader for the concerts and ancillary products, and we'd have to expect a move towards clearing via prices.

Reznor provides a nice compendium of links on scalping, including Russ Roberts' discussion over at EconTalk! Reznor listens to Roberts. Worlds colliding....

Update 23 March: I told you recordings are a loss leader for the concert. See Reznor's distribution of free EPs for folks signing up for email updates on his upcoming tour with Jane's Addiction (awesome) and Street Sweeper (never heard of 'em, but almost certainly worth trying on given the recommendation).

13 comments:

  1. I'm not sure about the 'enthusiastic fans up front' argument. I doubt that the performers set the prices and also, sport has scalpers even where none of the crowd is close to the players.

    The band cares about its reputation because it wants to sell CDs. Surely that is part if it and sport also relies heavily on TV revenues, merchandise, and local councils forking out ratepayers money. All those require popularity. For some reason many people find excessive profit seeking distasteful.

    There are examples where tickets are the only revenue but they are less popular so may not be good examples, e.g. plays or second tier sporting events.

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  2. I'd argue instead that we're just seeing a trend towards market clearing prices because prior arrangements where concerts effectively served as loss-leaders for albums has had to change with file-sharing; now, the CD tracks are the loss-leader for the concerts and ancillary products, and we'd have to expect a move towards clearing via prices.

    Cool insight. Sounds right to me.

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  3. Kearney: Well, in Reznor's case, linked and quoted above, he is deliberately setting below-clearing prices for the group of goods seats which he owns.

    There really are two separate arguments here. First, why do we see queuing rather than prices? On that one, Reznor gives a decent answer: collusion between the scalper and the venue allows the facade of "fair" pricing while ensuring a good chunk of the returns go to the promoter/venue/artist/sports team. That explanation seems fairly parsimonious.

    Second, if a band is deliberately using non-prices mechanisms to allocate the best seats and the above explanation isn't going on, why might they be doing it? A first cut could be that they're really trying to build reputation for fairness, but if that's the case, is it just that NIN is the first to see that the prior model no longer saves reputation? Or, is it that Reznor really just enjoys having his most ardent fans up front? Could be both. I can buy both.

    I'd buy the "sell CD" argument if that business model weren't now going down the tubes. Concerts don't promote CDs anymore; CDs promote concerts.

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  4. I think the reason they might be able to move to true market-clearing prices after the merger without any of the negative stigma would be the auction format: you can't blame your favourite band for being so awesome that other fans are willing to pay ridiculous prices.

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  5. Bands with decades of success DO charge market clearing prices - look up the prices for tickets to Billy Joel, Madonna, The Eagles, Pink Floyd, etc. I'll go out on a limb here and say it's all about sex - if a popular band were to change full market prices, there would be far fewer young 20somthing groupies in the audience, the presence of whom broadens the sex appeal of the artist. One way to test this hypothesis would be to see if ticket prices for female dominated bands trend higher than male dominated bands of the same relative success?

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  6. In a scenario where tickets are transferable, then everyone who actually gets a ticket for a oversubscribed concert is effectively valuing that ticket at the market price. If a "true fan" gets up at 7am to constantly spam the booking phone line until they get a ticket, good for them, but if they then decide NOT to sell that ticket on for the 5,10x markup they could get via ebay, then they have implicitly placed a value on that ticket.

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  7. I think any explanation of underpricing of tickets should include the "lifetime value" of the fan. Alienating a fan by pricing them out of a concert (as opposed to the fan not being fan enough to stand on line overnight for tickets) impacts an entire future stream of revenue--the difference between Reznor in twenty years booking Madison Square Garden or the Beacon as a legacy act. The present value of that future revenue might be judged to be worth more than the difference in ticket price.

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  8. iron maiden's approach to this problem has been a) allowing fan club members access to exclusive presales and b)holding a (free) lottery that only fan club members can enter. lottery winners are allowed early entry to the venue in order to get to the front of the crowd.

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  9. A scalper buys up all the excess inventory and thus is given the ability to extract a convenience yield from holding a contract that eventually "expires". A ticket is no different than an call option. As the event approaches the "premium" drains out and you are left w/ the intrinsic value which after Trent and NIN do an encore of "Hurt" is Zero. So pricing tickets is very complex and I think the scalper plays a valuable role, and in general its the "face" value that has to come down not the secondary market value.

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  10. I agree with darynr: I think people see auctions a lot differently than when a venue/artist charges directly. If you're participating in an auction, you think you just lost to a bigger fan or a rich dude, but when the venue sells you a ticket at market directly you just think you're getting ripped off.

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  11. It is relatively simple. When one thinks about audience, than it is mostly dominated by fans and hard-core fans. If now, prices are too high, less people attend because many of the fans won't have the money to attend. This does hurt the atmosphere, the experience and the long-term developpement of the band. So, I think this fandom is actually a major component for the band.

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  12. As long as the promoters allow (or encourage?)scalpers to have special access to good seats, this will never change.

    There are some still fighting the good fight....

    Bruce Springsteen uses a General Admission floor and a option to show up at 5:00 day of the show with your GA floor ticket and enter a lottery for a special section (1st 30 rows of GA seating) It has DESTROYED his scalpers revenue. There are 5,000+ potential front row center seats.


    Tom Waits did a show in Atlanta at The Fox (4,000 seat theatre) where you had to use your American Express Card to buy tickets (2 ticket max), all tickets were will call AND you had to present that Amex at will call to get inside. There was no actual ticket involved (so no scalping either)

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  13. Japanese musician Gackt keeps the first ten rows of any show to his fanclub, it's a complicated process which means a name on the ticket, a fanclub number, so you need your fanclub card as well as a photo ID to use the ticket.

    However, this did not prevent fanclub members from selling their Premium tickets on auction sites - buyers showed up with tickets they had (over) paid for, but were not allowed to use them.

    So even the best intentions of artists go awry. Penalties for selling tickets is a permanent ban from the fanclub, but it continues to happen.

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