Tuesday, September 25, 2007

Ticket auctions and other allocations

Young girls in Greensboro were in tears and their parents were up in arms last week when an upcoming Hannah Montana concert sold out in just a few minutes, leaving many families were waiting in line at the venue's ticket window.

Indignant letters to the editor soon followed expressing frustration that so many "little girls dreams (had been) crushed" and blaming promoters for allowing tickets to go to scalpers--parents noticed that tickets were immediately available on resale at inflated prices on web-sites like stubhub.com.

In this instance, bad communication was part of the problem. More than a third of the 13,000 tickets were "pre-sold" through Hannah Montana's fan club; only about 8,000 were available when the regular sales began. Although that should have been plenty to accommodate the families standing in line, there was an even larger virtual line. Internet sales quickly snapped up nearly all of the available tickets.

One way or the other, somebody was going to be disappointed in a situation like this where demand for a scarce good exceeds the available supply. The only way to reduce the disappointment would be to add another concert date, but even that might not be enough to meet demand.

The fans' real beef focuses on the "unfairness" of the rationing mechanism. Here a combination of pre-sales, queues, and regular sales were used to allocate the tickets initially, and resales (scalping) are being used to reallocate the tickets. Is this system actually unfair? Definitely, but maybe not in the way that you think.

Let's start with the scalpers, who put up the money for the tickets and then assume the risk of being able to resell them. If they can resell the tickets, scalpers are then in a position to capture the difference between the original sales price of the ticket and what some die-hard fans are willing to pay. Nobody forces the fans to actually buy the tickets from the scalpers. Those who do purchase tickets get what they want at a price they are willing to pay. It's just more than they would have had to pay in the absence of a resale market, with the scalpers pocketing the difference.

Even without a resale market, the scarcity of tickets would have led to some unfairness. Some people with only modest valuations of the performance would have gotten access to relatively low-cost tickets. Other people who had much higher valuations and who would be willing to pay more to satisfy those valuations would not have gotten access. Introducing a resale market (scalping) improves efficiency by allowing the people with the highest valuations to get access to the tickets.

There are alternatives that would eliminate the resale incentives. The simplest would have been for the concert promoters to set the initial ticket prices higher, so that there wasn't any excess demand. A clear implication from the fast sales was that the tickets were under-priced. If the tickets had been at the appropriate, market-clearing price there would have been no opportunity for resales--everyone who wanted a ticket at the going price would have already purchased one.

It's hard to forecast what the exact price should be. If promoters set the price too high, they might be stuck with empty seats. An alternative then would be to use a descending set of prices. Set the initial price very, very high, then every few hours or every day or so discount the prices by a certain amount until all of the tickets are sold. People with the strongest valuations and the least risk tolerance will start to take tickets at high prices; other people will move in at lower prices. Again though, at the end of the process, there won't be any resale opportunities. The unfairness in this system is that some people pay more than others for the same tickets.

Finally, the promoters could run an auction, with tickets and prime seat locations going to the highest bidders. Stubhub.com and Ticketmaster have already done this for some concerts.

Each of these allocation methods eliminates scalping; however, it's not clear that fans really want them. Under the current arrangement, a few lucky fans get access to tickets that are priced below the market clearing rate; others pay higher rates, with the surplus going to the scalpers. Under each of the alternatives--a uniform market-clearing price, high then descending prices, and auctions--tickets would never be sold below the market-clearing price. More of the revenue would be transferred to promoters instead of to scalpers and resellers.

In essence, the parents' complaint is that there weren't enough tickets at prices below the market-clearing rate. Little girls can wish for such make believe endings; parents should be more realistic.