Thinking Outside the Box Office

The search for better economic policy.
May 13 1999 3:30 AM

Thinking Outside the Box Office

Ticket scalping and the future of capitalism.

28000_28196_neubecker_scalping1

Except in Japan, the world economic crisis seems to have gone into at least temporary remission, and those who have been obsessing about the subject are turning their attention back to other matters. In my case, that means making a big push on my introductory economics textbook-in-progress. And so a little while ago I found myself redrafting the chapters on, yes, supply and demand.

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Now, my textbook is a labor of love; but it is also a commercial venture (or at least I and my publisher hope it is!). So, the first draft was tested on a focus group: people who are successful teachers of introductory economics at the sort of schools we hope will adopt the book. I learned a lot from the focus group. Among other things, I learned that what a middle-aged college professor thinks of as down-to-earth examples of economics in action might not always sound quite so down to earth to the ordinary college freshman, and that I had to have more examples the clientele could relate to--which means, in particular, sports. One focus group member suggested that the market for "scalped" sports tickets was a good example of supply and demand in action. So, I did some background research and found some very interesting stuff. But perhaps it is an indicator of my state of mind that what I saw during that research made me think, once again, about currency crises.

Ticket scalping is nothing new, though it continues to pose something of an economic puzzle. The fact is that there are a number of public events--most notably sports, but also concerts, plays, museum shows, etc.--for which tickets are consistently sold below the price that would limit demand to the available supply. Exactly why the owners of stadiums and theaters do this is a matter of some dispute. One theory (due to Chicago economist Gary Becker) is that tickets are underpriced because those who sell them believe that it is crucial to their image to have sold-out houses. Beyond this, many stadium and theater owners seem to believe that as an overall marketing strategy it is important that access to their most popular events be available to enthusiasts at moderate prices. For example, why doesn't George Lucas allow theaters to offer special preview showings of The Phantom Menace at astronomical (galactic?) prices, when surely they could find tens or even hundreds of thousands of people able and willing to pay? Presumably because so blatant a statement that wealth hath its privileges would alienate the tens of millions of nonwealthy moviegoers he counts on to turn the film into a megahit. Whatever the precise reasoning, what is clear is that when it comes to big games and big shows, private sector entrepreneurs themselves often feel that it is a bad idea to let market forces rule.

Enter the scalpers. If they can, scalpers will buy up large numbers of tickets directly from the box office and resell them at a profit. If the box office refuses to sell in bulk, they will offer to buy spare tickets from people who have come by them legitimately and perhaps hire people to stand in line. What's wrong with that? Well, the people who run the box office are attempting to pursue social goals--albeit in the ultimate name of profit--which require that tickets go not only to those who can afford to pay a lot but also to those who really care and are willing to book early and/or stand in line. If tickets sell out long in advance not to enthusiasts but to speculators, or if the long lines consist not of dedicated fans but of hired proxies, this attempt to pursue a long-term agenda is defeated. And so there is a running conflict between the long-run thinking represented by the box offices and the short-run market forces represented by scalpers--a conflict that seems increasingly to be running in the scalpers' favor.

Why does scalping seem ever harder to control? One reason is that because of the rising inequality of income and wealth, there are more people out there able and willing to pay extraordinary sums. This is above all true in New York, where there are thousands of people who will not blanch at paying $10,000 to see and be seen at a Knicks game. But scalping is also on the rise because of an interaction between technology and ideology.

It's clear that technology has made scalping much more efficient than in the past. Once upon a time it was a hands-on business. Shady characters would hang around stadiums offering to buy tickets at a premium or to sell them at an even larger premium. Those shady characters are still there, but you can also look up big-ticket brokers on the Web, call their 800 numbers, and comfortably conduct your transaction from home or office. This makes it easy for the out-of-town visitor to line up tickets for that special evening or for the hard-driving executive to impress his clients. It also means that everyone who has bought a ticket at the box office knows that the true cost of going to the show is not the sum he actually paid but the much larger sum he could make by reselling that ticket.

Still, the technology would not be as effective as it is were it not for a favorable ideological climate. While there are anti-scalping laws in many places--such as New York City--there are also a growing number of places, such as New Jersey, that believe in letting the market rip and therefore allow tickets to be freely resold at any price. And given modern communications technology, New Yorkers need not physically visit New Jersey to do an end run around the local regulations.

Illustration by Robert Neubecker

And so the pressure on box offices steadily intensifies. Box offices do fight back. A couple years ago Madison Square Garden, discovering that many of its season ticket holders were reselling them to brokers, revoked thousands of tickets in a stroke. And the people spending weeks in line to see The Phantom Menace are, as far as anyone knows, genuine fanatics rather than hirelings. Still, it is hard to escape the feeling that these are rear-guard actions. We seem to be heading for a future in which the crowd at a Knicks game will consist mainly of businessmen on expense accounts--and, so the management of Madison Square Garden fears, a longer-term future in which serious Knicks fans, finding that they can't afford tickets, lose interest, and therefore so do the businessmen. Short-run market pressures may eventually leave everyone worse off; and yet they seem to be getting harder and harder to defy--which brings me to global finance.

To my mind, at least, there is a sort of family resemblance between the phenomenon of ticket scalping and the problem of hot-money flows in the world economy. In both cases there is some efficiency case to be made in their favor. Ticket scalping does allow some people who badly want to see a game or show to do so. Short-term capital flows do sometimes provide badly needed finance or liquidity. In both cases, however, there are also costs--whether to the social mix that sustains a team's fan base or to the macroeconomic stability that sustains long-term economic growth. Stadium owners have judged these costs to be large enough to warrant serious attempts to limit scalping; and given the experience of the last two years, you don't have to be an anti-market fanatic to argue that some limits on hot money would also be a good thing, if feasible.

But the trouble is that between technology that makes it easier for markets to run rings around local regulations, and the reluctance of governments to agree on the sort of cross-border enforcement that might let them keep up with that technology, efforts to limit the market seem increasingly futile. Oh, mavericks such as George Lucas or Malaysia's Prime Minister Mahathir bin Muhammad may try to fight the trend and even achieve some limited success, but they are swimming against the tide. Indeed, as this article was being written, Lucas--under intense pressure from theater owners--gave in to the dark side of market forces. Some tickets to The Phantom Menace will, indeed, be sold in advance--and no doubt be snapped up by scalpers.

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