A recent post of mine explored the market for restaurant table reservations. Restaurants in high demand with long waitlists for tables could increase prices so that the market more easily clears. For potential reasons discussed in the article, they do not do this, which leaves the door open to third parties to buy and sell reservations for a profit.
The same economics applies to third-party concert ticket sales containing add-on fees. With popular unrest about the prices of event tickets with added fees, embodied recently by the Justice Department’s lawsuit against Live Nation and the passage of the Ticket Act in the House of Representatives, it is instructive to look at the economics of third-party ticket sales. Although the complaint issued by the DOJ and 29 state attorneys general is multi-faceted and deals with a number of practices by Live Nation and its subsidiary Ticketmaster in different markets, it’s discussion of the primary ticketing market is relatively devoid of this analysis.
Popular artists, like Taylor Swift, are holders of a monopoly. They are the sole producers of a good in high demand and are able to earn economic rents because of this. Ticketing companies exist because of the huge transaction costs that artists, their agents and promoters, and venues would incur in finding all of the fans interested in attending a show and selling them a ticket at an acceptable price.
If artists and venues set prices for their shows that are too low, there will be more ticket-demanders than there are tickets. This is what allows third-party sellers some leeway to affix fees at the end of sales – artists are not fully capturing the potential rents from fans and the new price with added fees better represents the true demand.
The online crash that occurred when Taylor Swift’s “Eras” concert went on sale in November 2022 is a demonstration that quantity demanded far outstripped the quantity supplied to a huge extent at the original, or “face”, price. Therefore, there was a shortage of tickets at the stated price.
To be sure, third-party intermediaries like Ticketmaster typically add fees on top of the face price in order to cover their costs and to earn a return for aiding in distribution. The power they have to add these fees onto the final selling price, however, is derived primarily from the artists’ popularity – the artist’s monopoly power – not their own.
To take an example from baseball, if you wanted to go to a regular season game at Camden Yards in Baltimore in 2018, you could confidently skip purchasing the tickets online and buy them at the gate instead right before entering the park. With the Orioles only winning 47 of their 162 games that season, tickets were not in high demand. Third-party sellers didn’t have much power to increase the selling price.
Given this, the extent that the add-on fees vary by artist or show could be driven by the popularity and demand for tickets. The add-on fees to see the Dave Matthews Band at Jiffy Lube Live in Bristow, Virginia could be expected to be higher than add-on fees for seeing a local D.C. band without much of a nationwide presence at the 9:30 club. Simply put, shows that are in higher demand will have higher fees and the further underpriced tickets are, the greater the expected add-on fees.
Economists have long discussed the economics of ticket resale by third-party brokers and “scalpers” (see a great EconTalk podcast on the topic here). A key question for economists follows from the insight given above: if the artists have monopoly power, why don’t they capture the monopoly rents? Why leave any of the profit for third-party sellers or scalpers to gather for themselves?
One reason the literature gives is that artists and promoters cannot profitably sell tickets in the late market at higher prices because they will be undercut by third-party brokers. To maximize profits, they have to sell at one price in the early market only. Other explanations involve artists giving fans more surplus on ticket sales to encourage spending on other items like merchandise. To avoid leaving profits on the table, promoters will often feed tickets to third-party sellers in exchange for a cut in late market sales. Whichever way you slice it, higher ticket prices derive from increased demand and inelastic supply.
Overall, ticket resale likely increases efficiency, i.e. the overall gains from trade in the market. Concert-goers who either don’t know about the opportunity or who don’t know they want to take advantage of it until the show is close at hand benefit from the existence of a vibrant resale market. Consider the business executive who purchased Taylor Swift tickets from a woman for $20,000 in the resale market.
Policymakers should keep this in mind when considering actions to combat “junk fees” or ticket prices that are considered “too high”. If policy makes market transactions more difficult, you will likely reduce efficiency without any offsetting benefits.
As is often the case, a scene from The Simpsons provides some wisdom here: back in season 5, Homer sleeps in line a week in advance to get tickets to a high-demand show. Excitedly he exclaims “I’m second in line, and it only took me a week off of work!” A passer-by comments, “with the money you would have made working, you could have bought tickets from a scalper”. Homer retorts, “in theory yes… jerk.”
Giorgio Castiglia is the Program Manager for the Project on Competition at the Mercatus Center, and a PhD student in economics at George Mason University.
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