Is Ticket Scalping All That Bad?

Miley Cyrus

At the Beijing Olympics last year, A.J. Daulerio of the Deadspin.com sports Web site decided to try to get into what was supposed to be a sold-out boxing match. Beijing, as some people might remember, was the Empty Seat Olympics, so the idea that Daulerio would be able to get into an Olympic match at the last minute was by no means far-fetched. Daulerio made inquiries and set off to find a scalper, apparently not hard at all. The rub, though, was that Daulerio didn't want to spend a lot of money on the ticket. He didn't just want to get into the match—he wanted his ticket cheap: at face value. The reaction from the scalper to Daulerio's woefully lacking offer? "I'd rather tear them up."

Daulerio's story of the Beijing Olympics perfectly illustrates the conundrum of ticket scalping. At one time, the thinking on ticket scalping was that it was a public nuisance, banned in most places and seen as a small step above theft. Over the past few years, though, the thinking has changed. Some recent economics papers have made the case for scalping. Many people now see anti-scalping rules as a vestige of quaint reliclike laws barring alcohol sales on Sunday. Several states—including, for two years, New York—have experimented with repealing their anti-scalping laws. If people want to pay a fortune for tickets to concerts and sporting events, why shouldn't we let them?

On the other hand, some well-known music stars have been very vocal about keeping tickets out of scalpers' hands. Bruce Springsteen went ballistic over TicketMaster selling tickets to his concert at far, far above the face value. Jon Bon Jovi made an issue of it when he found scalpers selling tickets to his free Central Park concert for hundreds of dollars. Now Miley Cyrus has gone on the offensive with a new electronic ticketing system designed to foil scalpers.

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All this gets even more complicated, though. Because guess what: At the same time that some musicians have complained about scalping, others, such as Neil Diamond, have sold large batches of their own tickets through TicketMaster's "resale" site, TicketExchange, at sky-high prices. Meanwhile, some of those who have complained about scalping have simply issued premium tickets with prices just as high as the scalpers charge—Miley Cyrus might not like scalping, but she's also selling ticket "packages" for $295 herself.

In navigating through all this, Daulerio's story and a bit of basic math turns out to be very useful. We've become more accustomed to the idea that if people want to pay a lot for something, it's often a good idea to let them. The market can do a lot to ensure that tickets go to those who want them most. But the scalping story is also not the simple "let the market sort it out" tale that defenders of scalping would have you believe. And that Beijing scalper's "I'd rather tear 'em up" nails the problem.

Many people assume that a laissez-faire market in which resellers auction off tickets will ensure that all the tickets get distributed, but this is emphatically untrue. All those empty seats at the Beijing Olympics testify to that. Or look at many sold-out Broadway shows, where you'll find that as the lights go dark and the curtain rises, some of the best seats remain empty.

How ticket sellers could end scalping tomorrow

The problem here is that the price at which every seat is filled and the profit-maximizing price are not the same. There's a very easy, if not quite intuitive, way to think about this. Imagine that someone very, very rich—yes, let's say Bill Gates; he's still definitely rich—badly wants to see The Producers on opening night. Gates can afford to pay just about any amount to see the show. But he doesn't especially want to. Nor does he even especially need the single best seat in the house (there isn't really such a thing, anyway). Any nice seat near the front will do.

Now let's say The Producers is being shown at a 1,000-seat theater with tickets priced at $100 each. That means a sold-out house will take in $100,000 in a night. Now let's say a scalper buys up all the tickets and sells just one to Bill Gates for $150,000. Well, now the scalper has made a nice profit. Bill Gates has his seat. And The Producers plays on opening night to an audience of one.

The key here is that the only way the scalper can sell a ticket for $150,000 is if he buys up all the seats. Otherwise, Bill would happily pay $100 like everyone else. This is, of course, an oversimplification. Scalping has become a lot more sophisticated than it used to be. The fact that many tickets are now sold at auction makes it easier for scalpers to adjust prices downward if tickets go unsold and means that fewer seats will be left empty. But in many cases, the scalper's business still depends in large part on making a calculation similar to the one that Daulerio encountered in Beijing.

For the scalpers' business to work, they will often need to limit the supply of tickets—and tear up the extras instead of selling them at face value. Or in other cases, they create a perceived shortage of tickets by dribbling them out slowly at auctions with fans not knowing whether tickets are really available. The result of this is unhappy fans and empty seats. This has some potentially bad long-term consequences. On Broadway, to take one example, theater owners are eager to create buzz around a show by keeping seats filled. If the venue is going to be half-empty, they'll even "paper the house" by having anyone connected to the production distribute free tickets. Short-run gains for scalpers create long-run problems for theater owners and performers.

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The traditional explanation for why tickets are underpriced—because keeping seats filled matters to the organizers—isn't the only one. Economists have questioned it and with some justification argued that even if you take the desire to fill all the seats into account, tickets to many events really are mispriced. That makes some people conclude that scalpers are making the market more efficient.

But even economists who think that tickets are badly mispriced can have problems with ticket scalping. In his Offsetting Behavior blog, economist Eric Crampton discusses another theory of scalping in a post that's probably the only essay in which you'll see an economist turn to an analysis by Trent Reznor of the Nine Inch Nails. Crampton argues that one of the reasons that scalping persists might be because venue operators find shady ways to share in the profits at the expense of fans and performers. Crampton notes that Reznor gives one very good piece of evidence that there's something shady going on here: Ticket sellers could end scalping tomorrow by just printing names on the tickets.

How to get real ticket transparency

That's actually more or less what Miley Cyrus is doing now by selling electronic tickets to her concert. That may well be the direction in which many ticket sales go. If indeed theaters and sports arenas underprice tickets to keep seats filled (or in the case of musicians, to make sure at least some of their young hard-core fans get in), the growth of the scalping industry will force them to be more careful to make sure those tickets don't get resold.

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At the same time, the burgeoning scalping business has also demonstrated that there is room at the high end for at least a few tickets to be sold at much higher prices. As Reznor points out, the ticket marketplace "shows a true lack of sophistication" because "the true market value of some tickets for some concerts is much higher than what the act wants to be perceived as charging." That's encouraged some performers—such as, again, Cyrus with those $295 premium seats—to charge much more themselves for some tickets.

Higher prices for some tickets and electronic ticketing for most is a kind of two-pronged attack on scalping. In the long run, this may well mean a two-tier market of fans queuing for many seats while a few pick up premium tickets for a lot more money. That's not the golden age of cheap tickets for all that some imagine in a world without scalpers. But it's a fair compromise that balances filling the seats, keeping the fans happy, and letting the market determine how much tickets should cost. And it's an advance over what we've seen over the past few years everywhere from the Olympics to Broadway: a mix of empty seats and $1,000 tickets, good for ticket brokers and hardly anyone else. Several years of debate over scalping have pushed the market for all kinds of tickets to be more efficient and transparent. But it won't be efficient or transparent enough until the folks who'd rather tear tickets up than sell them for face value are gone.