Saturday, 17 September 2011

In Defense of Market Pricing and Ticket Scalping

Tickets to popular cultural or sporting events, such as the London 2012 Olympics, can be distributed in a number of different ways. In this blog I consider some of the different methods and what consequences we might expect to result from these methods.

Supply and Scarcity

For any given cultural or sporting event, the supply of tickets is limited. That is, the tickets are a scarce good. If there are 50,000 seats in the venue, a maximum of 50,000 people can attend the event.

The question is: which 50,000 people in particular get to attend?

If fewer than 50,000 people desire to attend the event, then there is no problem with distribution of tickets. Every individual who wants one can have a ticket. A distribution problem only arises when there are more people who desire a ticket than there are tickets to be distributed. Let us suppose that 80,000 people desire to attend the event. Now a scarcity of tickets means that they cannot all be satisfied.

Random Distribution

One way to distribute tickets would be a random lottery. 80,000 names are entered into a hat, and 50,000 are chosen. The other 30,000 people are out of luck. (For now, assume the tickets are named so that they cannot be traded after they have been distributed).

There is a sense in which this the most fair way to distribute tickets. No one has any greater chance of attending the event than anyone else. And yet, among the 80,000 people, common sense tells us that not everyone desires a ticket with the same intensity. For a cycling event, say, there will be some avid fans, who attend cycling events regularly, know and support the cyclists and the sport with passion, and who get great pleasure from watching cycling events. There will also be some individuals who don’t care much for cycling, but want to go as a novelty, and for a nice day out. It seems unfair that the passionate fan might not be able to go because he was one of the unlucky 30,000, while some individuals who are far less bothered get to go instead.

Desire Cannot be Directly Measured

To make the allocation more efficient, then, what is needed is some way to assess how much the individuals desire the tickets. The best system will be one that allocates the 50,000 tickets to the 50,000 people who most desire them.

How then to do this? One way might be to get the ticket applicants to rate from 1 to 10 how much they desire a ticket. Put 10 if you are a big fan. Put 1 if you’re not that bothered. Clearly this isn’t going to work. Who would put 1? Anyone who does that is obviously not going to get a ticket, so why would they even bother applying? By the same principle, no one would give themselves less than a 10. It won’t do to just ask people how much they desire a ticket. What is needed is some way for people to demonstrate how much they desire a ticket.

Time-Commitment as a Measure of Desire

One way to do this would be to distribute tickets on a first-come-first-served basis. Whoever makes the application first gets the ticket. The idea is that the passionate fans will be the ones first in line at the box office. But is this necessarily the case? What of the family-man who cannot take the time to stand in line? What about the person has prior commitments on the day tickets go on sale? What about people who live far away from the box-office? These people are all discriminated against and disadvantaged by this system, at the expense of those with time to spare (like the unemployed) and those who live closest to the box office. It is still quite arbitrary to distribute tickets to those willing to give up the most time for them.[1] Why discriminate based on time? Why must this be the resource that must be given up to demonstrate a high desire?

Resource-Commitment as a Measure of Desire

A less arbitrary method of discrimination would be to allocate tickets to those willing to give up the most resources in general for them; in other words, to allocate tickets to individuals who most demand them.

To distinguish ticket applicants based on their relative demand, a price is set. In a monetary economy, the price is stated in money terms. As the price increases, the number of individuals willing to pay to attain the tickets decreases. There always exists some price at which demand equals supply; this is the equilibrium price.

For example, setting a price of £10 per ticket for the cycling event reduces the number of applicants from 80,000 to 60,000. That is, 20,000 people, although they desire the ticket if they were given it for free, are not willing to give up £10 in order to attain the ticket. Suppose the equilibrium price is £15. That is, exactly 50,000 people are willing to give up £15 to attain a ticket. By setting the price at the equilibrium price, the tickets go precisely to those individuals that demand them the most.

Demand and desire are not the same thing. Individuals with the highest demand are not necessarily those with the most desire. Demand is a function of both desire and wealth. The wealthy man who has all his basic needs satisfied can afford to be frivolous with his money, while a poorer person with a greater desire may be less willing to give up the same amount of money. But given that desire cannot be measured directly (a questionnaire won’t work), this is the least arbitrary way of discriminating ticket applicants.

Side-Benefits to Discriminating Based on Demand

There are also side-benefits to discriminating based on demand.

First, the money generated by ticket-sales generates revenue for the producer (the event organizer and distributor of the tickets). Without this income, the producer would have to fund the event out of his own pocket or through other means such as advertising.[2] This would mean that there would be far fewer events to attend, since it would not be profitable for producers to hold them. As a result of this, there will be far fewer professional performers.

The ticket price which generates the highest revenue for the producer is, in almost all cases, precisely the equilibrium price. For example, at the equilibrium price of $15 per ticket, the producer will generate 15 x 50,000 = $750,000. If he sets his price too low at $10 per ticket, he will only generate 10 x 50,000 = $500,000. If he sets his price too high at $20 per ticket, he will not be able to sell them all. He might only sell 30,000 of them, giving him a revenue of 20 x 30,000 = $600,000.

So there is a harmony of interests between producers and consumers. Purely out of self-interest, a producer will seek to set the price of his tickets at the equilibrium price – the price that will result in the tickets being acquired by the people who demand them the most.

Second, when good things come to those who demand things the most, there is a strong incentive to increase one’s wealth, since one’s wealth is a component of one’s demand. This incentivizes everyone to become wealthier, and this means producing goods and services that are in demand.

Once again, we see the harmony of interests: individuals acting in their own self-interest benefit all other individuals by being productive. Being wealthy (being able to satisfy more of one’s desires), is the reward for effectively satisfying the desires of others.[3]

Neither of these two side-benefits of demand-based distribution are present under any alternative method of distribution. In fact, for a time-based distribution, the incentives are reversed. Instead of rewarding productivity, a time-based distribution rewards time spent merely waiting, queuing, doing nothing, when that time could be spent productively. If goods are going to be distributed based on time, rather than demand, gone is the incentive to enrich oneself, and, by so doing, enriching others.

The Task of the Entrepreneur

A key task for an entrepreneur is to set prices such that profit will be maximized. The equilibrium price is the revenue-maximizing price, and the skill of the entrepreneur is in estimating what this price is. Competition ensures that the most skilful entrepreneurs are rewarded and remain in business, while entrepreneurs who perform badly are weeded out through bankruptcy.

But entrepreneurs are only human, and they often err, by mistakenly setting prices either too low or too high. In either case, his total revenue will be lower because of this. And as another consequence of his error, tickets no longer get into the hands of precisely those who demand them the most. Some other factor – time, favoritism, or maybe just luck – will end up determining who gets a ticket.

If an event-organizer sets the price of tickets too high, he will notice that they are not selling. He may decide to lower the price nearer the event, to make sure all tickets are sold. This makes up for his mistake somewhat, but total revenue is still lower, and the ticket allocation less efficient, than it would have been had he correctly estimated the equilibrium price.

If an event-organizer sets the price of tickets too low, he will sell out quickly. He could have maximized his revenue by charging a higher price. Tickets also end up in the hands of people who demand them less, and people who demand them more are left unsatisfied. Since he no longer has any tickets left, the event-organizer is powerless to correct this mistake.[4] But in terms of ticket distribution, the mistake can be corrected: by making the tickets tradable.

Tradable Tickets

When tickets are named, there is no possibility of trading them independently of the event organizer, so there is no way that an entrepreneurial error of setting a price too low can be corrected. The tickets remain inefficiently distributed.

But when tickets are anonymous, the market is able to correct the deficiency in resource allocation that results from the initial entrepreneurial error. Allowing tickets to be traded after they have been initially distributed ensures that tickets still end up in the hands of those who demand them the most.

For example, suppose the cycling event is sold at $10 per ticket. Some of the ticket-holders will be people who were willing to give up $10 to go, but not much more. Given the choice of $10 or the ticket, these people will take the ticket. But given the choice of $15 and the ticket, these people will take the $15. Conversely, there will be people without tickets who are willing to give up $20 for them.

The obvious solution is for these people to trade. Those without a ticket who demand a ticket more buy ticket from those who demand them less. A market for secondhand tickets might develop. The market price will be equilibrium price: the price that would have maximized revenue for the producer and ensured an efficient allocation of tickets to begin with. The revenue lost by the event-organizer goes to those ticket-holders that decide to sell their ticket on. In this example, each of these people on average would have received $5 revenue.

Ticket Scalping

The opportunity to make money by buying tickets with the intent to sell them is known as “ticket scalping” (or “ticket touting”) and this practice has unjustly acquired a bad reputation. In fact, ticket scalping has the effect of improving the distribution of tickets. The ticket scalper provides tickets to people who greatly demand them, and are willing to pay more than the initial ticket price, but did not acquire a ticket directly from the event-organizer because they were discriminated against in the initial distribution of tickets. Like all profit-making entrepreneurs, the ticket scalper is a public benefactor.

There is usually a lengthy time between tickets going on sale and the event itself. Because of ticket scalpers eager for a bargain, if the event-organizer sets his price too low, they will tend to sell out very quickly, primarily to these ticket scalpers. This should be welcomed, because it makes it easier for the people who most demand tickets to acquire them. There is a heavy element of speculation in what the ticket scalper does. He is taking a chance that the price of the ticket will increase as the event draws near. Like all speculators, ticket scalpers have the effect of reducing price fluctuations out over time. The expert ticket-scalper will sell at a price so that he sells his last ticket at the last moment before the event. This way he will maximize his revenue, and tickets will be available for consumers right up until the last moment. Successful ticket scalping benefits consumers by ensuring the tickets are allocated efficiently to those who most demand them.

Like all entrepreneurs, ticket scalpers may err, but those who do will be weeded out. A ticket scalper who has set his price too high will be seen at the gates of the event, selling his remaining tickets for less than the initial box-office price. At this point, he is cutting his losses, and should consider giving up the ticket scalping business.

Olympic Tickets

The London 2012 Olympic tickets were sold to the public through a combination of demand-based distribution and a random lottery. Tickets were offered at well below their equilibrium price. The applicants’ names were placed into hat, and names were drawn until all the tickets were gone. The tickets contain the name of the applicant, and trading of them is expressly forbidden.

The predictable result is that the tickets have been distributed in a highly inefficient way. There are people that haphazardly applied for a dozen events, just hoping to have a nice day out, and to be able to say they went to the Olympics, whose names were drawn from the hat. They gladly paid £20 for their ticket. Meanwhile you have the most passionate, loyal, excited fans of obscure sports who are left hugely disappointed. They might have paid £100 for what would be, to them, a once-in-a-lifetime experience. Many welfare recipients received tickets; their handout from the government loot easily covering the low price. Productive high-earners who could have paid more missed out. It is a slap in the face for people earning a living by successfully satisfying consumer desires. If all goods were distributed this way, there would be no incentive to be productive at all.

Why were the tickets distributed in this way? The answer usually given involves some notion of “fairness”. Why should “the rich” get tickets and “the poor” get no tickets? Isn’t this supposed to be a “special event”, one that everybody should have “a chance” to go to?

It is telling that the tickets were not distributed for free. Surely if it is unfair on poor people to have to pay a high price, it is unfair on the very poorest people to have to pay any price at all. Making it free would exclude no-one from having a chance to go, right? Why weren’t tickets distributed for free? It seems the sanity of using at least partial demand-based distribution prevailed.


While it is common for people to moan about the details of how the Olympic tickets were distributed, and many are rightfully bitter about not personally acquiring tickets, the view that they should have simply been sold at the equilibrium price, or, at the very least, that trading of tickets should be allowed, is apparently an unpopular one. As I have explained in this blog, any form of distribution besides demand-based distribution, market pricing, is unfair, arbitrary, inefficient and economically destructive.


[1] Online selling of tickets may help alleviate some of these problems, but then the whole point is lost, because simply placing an order as soon as tickets go on sale does not demonstrate a strong desire for the ticket in the same way that being first in line at a box office does. Also, it biases those with internet access, and technical capability.

[2] Theft could also be a source of income for the producer, in the form of taxation granted to him as a subsidy. A discussion of the (harmful) effects of subsidies would take us too far from our subject.

[3] Stealing is another way to become wealthy, of course. In fact, due to rampant corporatism, there is today a huge disconnect between one’s wealth and how effectively one has satisfied the desires of others. The super-rich are without exception only super-rich because they have secured government privileges. They have been able to become wealthy through violence, rather than through satisfying the desires of others.

[4] It should be noted that event-organizers do not always intend to sell at the equilibrium price. They may forsake the maximum revenue for wider business reasons, such as customer good will. For example, cinemas could easily charge a much higher price for opening nights of major movies (as evidenced by the tickets selling out very quickly), and could charge a lower price towards the end of the run (as evidenced by lots of empty seats). Why don’t they? It must be because, overall, they believe this policy would lose them revenue. Thankfully, ticket scalpers often save the day here, by selling coveted opening night tickets to those willing to pay a premium for them.

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