Scalpers get no respect

Prices are often higher in secondary markets than in primary markets. This is well-known phenomenon. Yet economists cannot agree on why it happens. Because economists can’t explain the phenomenon they are inclined to dismiss it as an example of irrationality. Primary sellers should just increase their prices is an argument we often hear. Mark Perry points to an example in the wine industry:

That was the conundrum facing a select group of Screaming Eagle mailing-list members this past summer when California’s most famous cult label released 100 six-packs of a 2010 Sauvignon Blanc priced at $1,500 each. The wines started showing up at auction soon thereafter, with a six-bottle lot in its original wooden case selling for $15,535 at a Spectrum auction in June. Screaming Eagle’s representatives weren’t happy, announcing that they would limit the 2011 production to just 300 bottles.

Mark Perry argues that reducing output doesn’t make economic sense. I tend to agree with him on that point, but what about the broader issue?

I’m less inclined to dismiss this sort of behaviour as being irrational – there is some sort of information asymmetry or risk-sharing going on.

Now the wine seller is unhappy about the on-selling, they have a quality control argument, and have excluded the on-sellers from their network. That is their choice – their private choice. On the other hand many states are passing ever draconian laws against scalping; that should be avoided as it undermines price discovery.

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55 Responses to Scalpers get no respect

  1. Driftforge

    Surely it’s not that difficult to reason out why this occurs, in limited markets?

    Producers of a limited good price either to benefit (reward) frequent customers (some of whom cash out) or to ensure they sell all the goods. If demand is poorly calculated, there will be unmet demand, at least some of which will be further up the ‘prepared to pay’ scale.

    I would have thought this the logical result of standard supply/demand curves in a supply limited situation; where is the conundrum?

    I also see no reason why it should be prevented. Actually promotors should be looking for ways to take the additional available return….

  2. Chris

    I’m less inclined to dismiss this sort of behaviour as being irrational – there is some sort of information asymmetry or risk-sharing going on

    Isn’t the way to fix this just to auction them off in the first place rather than placing a fixed price?

    The arguments for setting a price lower than they could theoretically get I’ve heard from rock bands for concert tickets is that they want to make the concert accessible to more people than just the wealthiest of their followers. So they obviously don’t want scalpers buying all the tickets and then auctioning them off. Can be a bit hard to enforce though.

  3. ar

    Risk-sharing… concert promoters could assume some more risk and sell tickets closer to the event if they want to reduce scalping. Hey, why not sell tickets at the door? But I guess they don’t want to do that…

  4. Louis Hissink

    Much the same for same in selling a diamond – the buyer is prepared to purchase a highly priced lump of carbon that others won’t. The technique in the diamond business is that if a particularly large stone is produced, it is offered in secret to wealthy bidders, usually Arabs, who will buy it if there is zero publicity about it. Why?

    Those who don’t seem to find solace in socialist theories.

  5. Monkey's Uncle

    I have always assumed that things like ticket scalping occur primarily due to a lack of sufficient price discrimination on the part of the primary sellers. This creates a market to earn arbitrage profits by buying tickets at the fixed price and selling them to those consumers willing to pay more. If concert organisers practised better price discrimination, they could reduce the market for scalpers. One option would be to withhold a certain percentage of tickets for sale until closer to the event, and sell them at a higher price.

  6. Jarrah

    Tickets are scarce, not everyone who wants one can get one. Thus they must be rationed.

    As Chris points out, some performers or ticket sellers don’t like the idea of rationing by price, ie by auction. Instead they ration by first-come first-served (and often imposing a cap). Why they think this is more fair, I don’t know.

    The problem is this doesn’t distribute the tickets according to people’s subjective valuation, and so someone lucky enough to get in line on time can have a big incentive to pass the ticket onto someone who wasn’t so lucky and is willing to pay a large amount to make up for that.

    Ticket sellers can either take away the incentive (by going straight to auction), or the opportunity (by imposing safeguards like checking ID at the door). I think they should just go for auction. That excludes ardent fans who can’t afford the price, but the current system excludes ardent fans who didn’t click refresh on the Ticketek website fast enough (unless scalpers step in).

  7. eb

    If six bottles of Sauvie Blanc for $15k isn’t irrational, I don’t know what is!

    I suppose it’s an example of the “greater fool” theory.

  8. Steve of Ferny Hills

    The XY GTHO sold new for $5300. This must be scalping?

  9. Chris

    Why they think this is more fair, I don’t know.

    Perhaps when you had to line up at the counter for hours/days beforehand it was a better indicator of how dedicated a fan you were compared to how much money you are willing to spend. As you say internet purchasing kind of changes that now. If they really wanted to they could issue a subset of tickets in a lottery with ID required. Pay for the higher costs by auctioning the rest of the tickets.

  10. Samuel J

    Screaming Eagle is pretty average wine. I’m selling six bottles of Samuel J Port for $15000. Let me know if you’re interested.

  11. Aliice

    Jarrah

    all you purists who want to exclude people because they cant afford thr price of things are just too purist for me (and too discriminatory).

    But as a counter argument, if scalpers see an opportunity to make a profit from a companies unwillingness to do so by auction – then good luck to scalpers.

    No one every made a profit by not getting something cheaper and selling it higher and I would rather see the scalpers get the tickets than the company takes all approach if the company cant keep up with the nimbleness and proximity to the event of the scalpers feet. Who know – maybe the scalpers work for the ticket sellers (now there is an idea for the ticket sellers).

    Anyway, even if the ticket sellers auctioned the tickets to the highest bidders – they dont run continual auctions across time and must be happy with the way they currently sell or they would do just that – auction, the scalpers would probably bid at the auction and would still sell higher on the night because the company just isnt that flexible to be there with spare tickets (and we praise flexibility dont we?)

    Im surprised at you Jarrah trying to take the earnings of scalpers away from them.

  12. Jim Rose

    scalping and the deliberate under-pricing of tickets have strong rationales.

    Making people queue will ensure that only the most fanatical supporters buy so the concert will be exciting rather than an audience of boring middle-age farts who want to sit down all the time and need to go to the gents on a regular basis.

    Two-side markets require the right sort of people to be buying as well as selling so that the status and sorting value of the good is sustained.

    A singles bar is a two-sided market where single men and women must both congregate. Free wine for ladies; no knuckle-draggers ever allowed in the door.

    Wine clubs are like singles bars but they are made up of snobs seeking snobs.

  13. dd

    Middle men, in general, get no respect, whether it be realtors, car salesmen, brokers, importers, day traders, speculators, agents, promoters, and so on.
    People don’t understand why they exist or what role they play in the economic ecosystem. We assume that, because we can’t think of a reason why such people exist, there mustn’t be a reason. Therefore they’re evil.

  14. Jim Rose

    a reason people pay the high price is the warm inner glow of knowing its second hand value, but being above that. ask any collector to part with his treasures.

  15. Jarrah

    I neglected a third option – reduce scarcity by having more concerts. That’s hard on the performers, but it is an option.

  16. dd

    Jarrah, there’s actually no other solution. “more concerts” isn’t a solution because fame is pareto distributed so the most famous performers will never be able to meet all the demand for their shows, whereas less famous performers will not be able to attract a huge audience.

    Auctions don’t really solve it either. auctions occur at a point in time (and sure, you can play games like staggering ticket release, but each release is “at a point in time” …. which obscures the problem rather than solving it). Scalpers efficiently distribute ticket sales across time.

    Scalpers are the only solution.

  17. Infidel Tiger

    I neglected a third option – reduce scarcity by having more concerts. That’s hard on the performers, but it is an option.

    Even harder if you are after a ticket to the Grand Final.

  18. Pyrmonter

    What about the impressario’s liquidity? The primary sale often occurs well in advance of the event, when operators have very high implicit discount rates and limited capital; selling off tickets “cheaply” both brings in money, now, when liquidity is low and eliminates the risk of non-sale.

  19. “Screaming Eagle is pretty average wine. I’m selling six bottles of Samuel J Port for $15000. Let me know if you’re interested.”

    Mate, if it looks like port you’ve got kidney problems!

  20. dd

    selling off tickets “cheaply” both brings in money, now, when liquidity is low and eliminates the risk of non-sale

    Exactly. It’s in the promoter’s interest to offload the tickets early; otherwise they’re a potential liability.

    It’s good business, and they don’t care that they’re not offering a premium boutique service to procrastinators and last-minute impulse buyers (like me). Someone else’s problem. Their problem is staying afloat.

  21. Jim Rose

    most famous performers will never be able to meet all the demand for their shows

    DD, large auditoriums and TV go a long way in scaling up supply and explain why superstars are very rich.

    Central to the economics of the demand for entertainment is novelty. People want to be surprised, but never know in advance what novelty will entertain them next.

    Superstars suffer from over-exposure in that they lose their novelty value. They then go to Vegas and entertain package buyers less concerned with novelty.

  22. JC

    DD

    Scalpers may be a solution, however we should not pretend that they can’t screw up a franchise.

    I read somewhere recently that the scelpers are offering tickets to Stones concerts that they are really pissing off a large numbers of Stone heads.

    You never want to piss off a decent slab of your customer base.

    Now this of course is a marketing problem for the Stones and the government should stay right away from it.

    Anyone who thinks scalpers require government intervention are a disgrace.

    Concerts, venues any stuff like that are first and foremost an entrepreneurial endeavor. Any entrepreneur wants to do two things, minimize risk and maximize profits. If a scalper shows up at the door and wants to buy all your tickets you should be able to decide without some arsehols telling you can’t.

    Scalpers also perform a very useful function. They help the promoter figure out where they should set the price of tickets.

    However like any tool, they should be used carefully.

  23. Jim Rose

    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?

    see http://offsettingbehaviour.blogspot.co.nz/2009/03/economics-of-scalping-trent-reznor.html for an answer

  24. Scalpers are only ever a small proportion of the market, yet they cause such a fuss.

    It’s the reaction that’s the problem.

  25. JC

    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?

    Because they want cash flow like any other rational business person unconnected to the GreenParty. The only people who would think otherwise would be a Greens Senator or an ALP cabinet member.

  26. JC

    Scalpers are like foreign exchange traders or big line stock traders such as Goldmans or other specialist firms.

    You want to move a large volume out you got to the people who are capable of moving it and lock in the rate or the price.

  27. JC

    Scalpers are only ever a small proportion of the market, yet they cause such a fuss.

    It’s the reaction that’s the problem.

    David,

    That may be the case here, however i don;t think I ever went to a Broadway show, concert, football or baseball game without buying tickets from a scalper. It may be small time in Oz, but I don’t get the impression it is in the US for instance.

  28. Jim Rose

    best paper is http://jimmyatkinson.com/papers/the-economics-of-ticket-scalping/ which surveys reasons based on more than rockstars being fine chaps.

    1: The difficulty of selling out with uncertain demand
    2: Appealing to the common man
    3: Differing profit maximization functions
    4: Ticket Resellers as Necessary Market-Clearing Agents

    scalpers perform a service. they are on site in the hours leading up to the event. They close the market, a necessary function of any efficient market.

    the scalper knows more about the market than a fan who comes to unload tickets once in a while or a fan who comes to the venue to purchase tickets one time

  29. JC

    the scalper knows more about the market than a fan who comes to unload tickets once in a while or a fan who comes to the venue to purchase tickets one time

    Shocking isn’t it? People performing an agency/dealer service. Who would have thought such a thing can happen.

  30. That may be the case here, however i don;t think I ever went to a Broadway show, concert, football or baseball game without buying tickets from a scalper.

    So there we have it JC was depriving long term loyal fans who might spend 5 years following a losing team to see the big games etc. when the team turns good.

  31. wreckage

    So there we have it JC was depriving long term loyal fans who might spend 5 years following a losing team to see the big games etc. when the team turns good.

    I CARE SO MUCH

  32. Jc

    Kelly you idiot, I’m saying that’s the only way to buy tickets for certain venues over there.

    I wish I could deprive you of posting comments here and no scalping would be involved.

  33. I wish I could deprive you of posting comments here

    No you don’t, you need some people to act as a nemesis.

  34. Yobbo

    The XY GTHO sold new for $5300. This must be scalping?

    They are worth more now because most of them are in landfill and they are much rarer than they were at the time of the original sale. It’s not really the same thing as scalping. Same goes for any antique collectible item.

  35. brc

    Scalping is just consumers cashing in on the consumer surplus the original retailer leaves on the table. I’ve never had a problem with it. The only issue would be when all the tickets (or whatever) are cornered by the scalper through dubious means, such as having an inside connection to get a large allocation.

    Whenever anyone talks about scalping, they only talk about obscene profits. I would assume that sometimes scalpels sell below face value and/or get left with unused inventory as well.

  36. Jim Rose

    when scalpers have unsold tickets, who compensates them?

  37. Dan

    What about concert bootleggers? Was a fairly big business in the 60′s and 70′s. what role do they perform in a market? From a strictly copyright aspect it is illegal, at least the musicians thought so. I know Frank Zappa got around this by selling the concerts in a package, on CD instead of cassette, for cheaper than what the bootleggers were offering.

    In terms of the wine company example, they set themselves up by producing a product in severely limited quantities and now they are pissed off that people are on selling for a tidy profit. Would they not benefit if they cellared a similar quantity for a few years and then sell that vintage later below what the scalpels sold it for? That’s the risk here, if you bought at the inflated $15k and then two years later the winery sells the same product (properly cellared) at $5k you would feel like a bit of a fool.

  38. Jannie

    To me, large batches of tickets coming on to the market at one moment, is a bit like the seasonal supply of an annual harvest. Except they are selling their crop at a fixed price per seat, rather than the max the market will offer on that day. You can buy a cheap stash at harvest day knowing prices will be up when the winter drought comes, but not be sure about how many others are also trying to make the same dollar. But you can be sure there are plenty of lazy consumers who will only think about their supply problems on the day before they run dry.

    Scalping is a kind of speculation, with some premium added to compensate for standing in the queue, which should operate to stabilise prices. Except it doesnt?

    The real mystery is why anybody would pay good money to watch some pathetic old geriatrics from 200 yards away.

  39. Chris

    Jannie – that might be true when you have only mildly popular events. But when you have events that sell out in 30 minutes and its clear that a lot of people who actually wanted to attend the event rather than buy them to resell and make a profit missed out then the middle-men don’t add anything at all.

    In those sorts of cases I think a lottery + id requirements results in more of the genuine fans getting the tickets at the price the band wants to sell them at – if that is a priority of theirs is. Otherwise they might as well go for an auction system as they’ll make a lot more money.

    The downside to both scalpers and auctions is that fans may get annoyed and as a response no longer buy their cds or merchandise.

  40. Dan

    Why not just license scalpers? You could call them independent ticket distributors.

  41. Pedro

    http://www.forbes.com/sites/modeledbehavior/2012/05/25/what-jack-white-can-teach-us-about-economics/

    The interesting question is not why scalpers get their opportunity, but why people get so upset about it. Envy pure and simple.

  42. Dan

    Similar thing here, although this relates directly to distribution.

    I’m not sure of the wisdom, but they expanded the program to worldwide participation.

  43. garry

    Given the slightly dodgy nature of “scalping”, I expect their income tax & GST returns are works of fiction-or non existant. Otherwise I could not care less, unlike the hysterical wailings of populist politicians and the media, pandering to the prejudices of the “liitle” people.
    I can see money in this for the winery. How about some straw man puts the six-pack up for auction, just before next years vintage, and the winery has two active bidders drive price up sky-high. Apart from auction commission, no real cost to get this publicity. Double next years limited edition, and watch the mug punters falling over each other to make a killing, investing in the “limited edition”.

  44. Jarrah

    “Even harder if you are after a ticket to the Grand Final.”

    Unless there’s a draw! ;-)

  45. Tel

    Didn’t we already have this discussion with apples at the supermarket?

    The basic idea is you can sell the same product for two different prices to two different people, because of timing, quantity, convenience, etc it isn’t exactly the same product.

    The logical conclusion is that the music industry should sponsor their own scalpers… it makes sense when you consider they buy their own records.

  46. Jannie

    Chris it actually gets interesting the more you think about it. A Rock band can choose to limit the supply of concerts, but there is only one Grand Final per year, per code.

    The supplier may want to limit the price of the article, but the market knows its value is higher and will desperately scramble for position at front of the queue, trampling on little old ladies etc. Are the punters responsible for hurting the little old ladies, or is it the supplier?

    Its like throwing a handful of coins in front of a bunch of street urchins. It shows you how effective greed is, and its not the cutest and needful kids who pocket the money.

  47. brc

    Didn’t we already have this discussion with apples at the supermarket?

    The basic idea is you can sell the same product for two different prices to two different people, because of timing, quantity, convenience, etc it isn’t exactly the same product.

    The logical conclusion is that the music industry should sponsor their own scalpers… it makes sense when you consider they buy their own records.

    Exactly. In the case of the apples it was the business using price discrimination to capture more of the consumer surplus. Any business that doesn’t do so is stupid. Therefore concert promoters who don’t have a way to capture the very large consumer surplus left by concert pricing are stupid. They could easily reserve a block of seats for open auction, but choose not to, leaving money on the table, which scampers then cash in. The fools are the promoters, which the use the predictable responses of ‘won’t the government do something!’ and ‘won’t someone think of the children (fans)’

  48. Pedro

    “They could easily reserve a block of seats for open auction, but choose not to, leaving money on the table, which scampers then cash in.”

    If they’re not then it would be for marketing reasons and not because they are stupid. 90% of people think there is such a thing as a fair price.

  49. Jannie

    Maybe they could bring back the Royal Box concept for the modern day aristocracy, Kate Blanchett, Tim Flannery and Hollywood types. Charge 10 times the price of the stalls reserved for the ugly workers, and guarantee no contact.

  50. Dan

    Jannie. Sorry to fuck up your name.

  51. Jim Rose

    are scalpers any different from Bucket shops to second-hand airline tickets?

  52. Jannie

    No worries Dan, its often been read as Janine, Jannie being a bit non standard. Its pronounced same as in ‘Money’. heh.

  53. Dan

    Like a south african pronunciation?

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