In defence of scalping [updated]

Niko Kloeten cites me in defence of ticket scalping over at the National Business Review.

Rugby World Cup ticket scalpers are being used as scapegoats to excuse the greed and incompetence of the government and the New Zealand Rugby Union.

The deluge of scalping-related stories has already started, with Trade Me removing listings for semi-final tickets.

You’d think scalping was illegal or something. Well, it is: the Major Events Management Act 2007, which might as well have been called the Pork the NZRU Act, imposed a maximum penalty of $5000 for this activity.

But far from being a crime, ticket scalping is a market response to under-priced tickets, as economist Dr Eric Crampton from the University of Canterbury explained.

The best argument for setting a binding price ceiling for sporting event tickets is that allocation by queuing may give you a more enthusiastic crowd than allocation by prices. And for a private firm, that's a fair enough decision. The increase in value of broadcast rights might be worth it.

But it's a lot harder to make that kind of case for a publicly funded event like the Rugby World Cup. The New Zealand government is to be on the hook for a fair few RWC costs; Christchurch City Council has wasted a ton of money improving the stadium to handle crowd numbers that it will never ever see again. Instead, it looks more like a transfer to rugby fans from those less keen.

Fortunately, the losses from the inefficient allocation mechanism are somewhat limited. Here's my best understanding of the ticketing mechanism.

A big chunk of tickets are set aside for distribution through Rugby World Cup Limited, many of which are sold through Official Travel and Hospitality Packages. I'd be surprised if that allocation weren't sold at market clearing prices. They can take up to half of the tickets for each match, and seem to focus on getting tickets for the higher demand games.

So a big chunk of the tickets for the most popular games are taken away. How to boost demand for the less popular games? Start by selling tickets in venue pool packs - folks willing to buy a ticket for every match played by a team or for every match played at a venue get early call. Suppose you're not willing to pay some high price, say $1500 - the website says nothing - $795 for the pool match of your choice ($6395 per person for a set of tickets to the semi-final and final games) (as part of a hospitality package) but you would be willing to pay say $1000 for a set of tickets including decent seats for bad games and bad seats for good games. If there's enough value in filling up the venues for the low expected demand games, then this isn't crazy; it's just bundling a good with a bad. They might then expect that the sunk cost fallacy will kick in and folks won't just throw out the ticket for the expected-to-be-boring games.

Half of the good seats for the good games are taken up by RWCL and sold likely at close to clearing prices. The bad seats get bundled with seats for boring games. How to get folks to buy more of the seats for the boring games? Give them a lottery ticket for seats in the best games - the finals.

But this still doesn't seem consistent with profit maximization. I know the debates around a la carte pricing in cable tv markets (here here here) but my impression had been that results there were somewhat specific to the cable TV industry: zero marginal cost of offering a larger rather than a smaller bundle of channels to a particular subscriber. The marginal cost for bundled rugby seats is the revenue that could have been derived from selling the bundled but unwanted seat to someone else. It just doesn't seem plausible that the gains from having a few more people buy tickets to games they don't wish to attend outweigh the losses from forgoing some higher revenues on the premium matches.

So why does the RWC set its pricing structure like this? It's not impossible that the structure is somehow profit maximizing even in the absence of an external political game. Concert tours used to sell tickets well below market clearing prices when those tickets were loss leaders for CD sales. But I'm having a hard time seeing for what the RWC tickets could be serving as loss leader.

It seems more likely that the pricing structure is targeted at an external political game. This would be consistent with Porter and Thomas's findings about sports ticket pricing in the US. It's hard to believe that the government would shell out about a half a billion dollars to support the RWC unless there were at least the impression given that regular folks would be able to buy tickets for some of the more important matches. Having a relatively smaller portion of tickets allocated through oddball lottery mechanisms tied to buying tickets for earlier matches gives everyone some chance at getting a ticket and so increases public support, or at least attenuates opposition, to the vast public subsidies.

That also would explain why the government would step in to make scalping illegal for these events. If most of the few seats allocated through this system wound up being on-sold to folks who could afford market clearing prices, voter support for the "tax (mostly the rich but other folks too), give us cheap rugby tickets" plan would erode; "tax (mostly the rich but other folks too), provide big subsidies so rich people could go to rugby games" is less popular.

And so I come out on the side of the scalpers. I'm most convinced that there should be no legislation banning on-selling. If the RWC wants to print customers' names on the tickets and to require photo-id at the gate, that should be up to the RWC. But there's no reason the state should be involved in helping to prop up the pricing mechanism other than by not forcing RWC to honour tickets that were sold outside of its stated contractual guidelines.

I also can see no particularly good reason that somebody with a ticket that somebody else values more shouldn't be able to make a buck in the transfer. Why should all the surplus go to the buyer? In that world, many tickets are bought up early by folks intending to on-sell at a profit and some poorer rugby fans who otherwise would have attended a game would instead watch it on Sky. But consider:

• Even the "cheap" tickets for popular games are going to cost a lot: tickets for the finals start at $400, at least for the tickets now available. Is it really horrible that we transfer a bit of utility from folks able to afford $400 tickets to folks who can afford to pay $1200? What would stop the person who would otherwise queue for his own tickets from queuing to buy tickets to scalp? In that case, everyone's better off.
• The RWC might then instead move to market clearing prices for all games, in which case it could afford to take on a bigger share of the overall costs of the event. The savings could be directed towards other things that make lower income rugby fans happy, if it's their utility you care most about.
• I also have a hard time seeing why the social welfare function should weight so highly the utility of rugby fans relative to everybody else.

Why the lengthy post on Rugby World Cup and scalping? Niko Kloeten over at NBR asked me this morning for a short bit on scalping in general - I gave him the standard economic case in favour of scalping, linked to at the top of the post. But now I'm scheduled for five minutes on Thursday morning's TVNZ Breakfast programme on the same topic. And the best preparation for that kind of thing is hashing things out in a Blogger window.

Update: video here.
Update 2: Fixed a couple of links, added some pricing info.