On the Economics of Ticket Scalping

We analyze ticket scalping during UAAP games using a simple demand and supply framework.

TJ Palanca https://www.twitter.com/tjpalanca
07-10-2013

Profiting off the Animo

DLSU has just won a game against Ateneo after two years of losses to the rival. (Photo: <a href='http://ph.sports.yahoo.com/photos/uaap-season-76-july-7-dlsu-vs-admu-slideshow/uaap-season-76-july-7-dlsu-vs-admu-photo-1373219641305.html' target='_blank'>Winston Baltasar</a>)

Figure 1: DLSU has just won a game against Ateneo after two years of losses to the rival. (Photo: Winston Baltasar)

Animo La Salle! My dear alma mater has just won against rival Ateneo in UAAP men’s basketball, 83-72, breaking a six-game losing streak to the Eagles since 2010. Hopefully it’ll continue throughout the season.

With the Green Archers’ losing streak broken, it’s only to be expected the the second rivalry game would be in very high demand. A combination of limited seats in the arena, intense demand, and intentionally low ticket prices, would give rise to the problem of ticket scalpers, or ticket price arbitrageurs. Despite measures taken to prevent scalping, the game last July 7 was still plagued with ticket scalping. They profit off school spirit, something which I find personally objectionable but economically inevitable.

It’s an interesting economic problem and it’s great fun to think up solutions for this issue, but first, we need to know…

How Scalping Happens

In order to find out how to curb scalping, we’ll use an economic perspective to analyze the behavior. It’s a very simple analysis and only makes use of basic supply and demand concepts. (Disclaimer: I am just a student and thus do not claim absolute accuracy over the various concepts used.)

The framework is set up using the following observations:

Using supply and demand to explain ticket scalping behavior

Figure 2: Using supply and demand to explain ticket scalping behavior

Usually, ticket prices are set below equilibrium, or at a very low price, to ensure that students are able to afford the tickets and support the game. This is apparent when the willingness to pay of students is almost always above the ticket price of P75 to P550. This creates excess demand for tickets and thus a disequilibrium, or a shortage of seats.

Scalpers then come in and take advantage of the fact that a student is willing to pay much more than what the ticket was originally sold for by buying it up first then reselling it at the maximum willingness to pay. Technically, this is called perfect price discrimination. Thus, he can sell it to students for a hefty margin - sometimes up to 8 times the original price. The area in red is the maximum profit that scalpers realize if they are able to exactly match the prices they charge with the students’ willingness to pay.

Sometimes, scalpers may even sell fake tickets to those desperate and reckless enough to purchase without inspecting the ticket. In other words, scalping happens because there are just too little tickets to serve an abundance of willing supporters that result due to prices being set at below equilibrium.

Why not just raise ticket prices?

Most economists propose an obvious and simple solution: simply raise the prices to equilibrium so that supply matches demand, increasing the producer profit and cutting away a substantial portion of the scalpers’ profit. Such an action is illustrated below:

Why simply raising ticket prices isn't going to work.

Figure 3: Why simply raising ticket prices isn’t going to work.

However, as you can see, there are still a few issues with this situation:

Given that simply raising the ticket price is not an issue, how can we curb the scalping in basketball games? Well, this type of thing happens all the time, particularly when there is huge demand for a certain event with limited seats, e.g. a concert, other sports event, product launch, or attraction. Kid Rock is a musician who is leading the charge in battling ticket scalpers, and he’s been quite successful. Let’s figure out how he’s done this.

Beating the Ticket Scalpers

Kid Rock used a combination of price, supply, and reservation to combat scalpers in his concerts. He used four strategies:

The effects of strategies 1 to 3 are shown in the graph below:

Figure 3. How Kid Rock battled the scalpers at his concerts. (<a href='http://www.npr.org/blogs/money/2013/06/27/196277836/kid-rock-takes-on-the-scalpers' target='_blank'>Article</a>)

Figure 4: Figure 3. How Kid Rock battled the scalpers at his concerts. (Article)

Guess what? It worked for Kid Rock. All his shows were just about sold out, but not totally sold out. This means that the pricing is actually quite close to market-based pricing, and that’s a good deal not only for the show/game’s producers and performers/players, but also for the many fans eager to watch or support their team.

There are other ways that one could also combat scalping:

  1. Totally Nontransferable Tickets. If airlines can do it, why not the events industry? Tickets, especially in this age of online booking, can be reserved and booked to a specified name, and entrants should be required to present identification to enter the concert. I realize that this does stifle the freedom of people to resell their tickets if they change their mind, so an alternative could be to allow transfer, but also charge a transfer premium to the new assignee of a ticket.
  2. Cash Rebate Upon Entry. This could be applied if non-transferability cannot be enforced. The organizers can charge a high ticket price, equivalent to the market rate or “scalping” rate, and return cash to the people upon entry. This way, prices can still be kept low for actual concert/game attendees. This could also increase purchases of auxiliary items such as snacks, t-shirts, or other materials in the venue itself.

So, there you go, just some of the ways that we can combat scalping. The market and its resultant behaviors are tricky, but then it just takes well-conceived and smart plays to get it right.

Caveat: It’s important to note that while scalping is, on its face, morally objectionable, the scalpers are simply responding to the market opportunity that arises when event organizers charge too low a ticket. If this is done to keep the game accessible and to increase consumer surplus (i.e. UAAP games), then I am all for eliminating scalping, but if it’s done just to give the impression that shows are “sold out” (i.e. concerts), then scalping actually serves to foil this deceit and is therefore beneficial.

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Text and figures are licensed under Creative Commons Attribution CC BY-NC-SA 4.0. Source code is available at https://www.github.com/tjpalanca/tjpalanca.github.io, unless otherwise noted. The figures that have been reused from other sources don't fall under this license and can be recognized by a note in their caption: "Figure from ...".

Citation

For attribution, please cite this work as

Palanca (2013, July 10). TJ Palanca: On the Economics of Ticket Scalping. Retrieved from https://www.tjpalanca.com/posts/2013-07-10-economics-of-ticket-scalping/

BibTeX citation

@misc{palanca2013on,
  author = {Palanca, TJ},
  title = {TJ Palanca: On the Economics of Ticket Scalping},
  url = {https://www.tjpalanca.com/posts/2013-07-10-economics-of-ticket-scalping/},
  year = {2013}
}