Distribution of Tickets to Events

Economics Economics Questions
1

There are a large number empty seats at Olympic venues (at one point, the army was called in to fill some of them!), and a large number of people eager to fill them but being unable to get tickets, and so I have been involved in many discussions with people about why this is the case. The blame is generally being placed on the corporate sponsors, because they are apparently not using the tickets that were given to them as part of their sponsorship deal. I’ve been trying to make the more general point that the problem was the method of ticket distribution as a whole. The method used was 1) giving away a whole bunch of tickets to the sponsors, 2) offering the rest to the public at an extremely low price, and then randomly allocating tickets to applicants, and 3) strictly forbidding trading of tickets second-hand.

I wrote about all this in a blog post from September last year: In Defense of Market Pricing and Ticket Scalping.

At the weekend I was involved in a challenging discussion about ticket distribution in general, and I was not happy with the way I responded. I thought I’d share it here to see what you guys would say, and to check my understanding as well.

My general argument was that the Olympic tickets, and any tickets for sport/cultural events, should ideally have been sold at the revenue-maximising price, as this would have resulted in the venues being filled by precisely the most capable buyers. And tickets should definitely be freely tradeable to correct for inevitable changes in demand conditions and entrepreneurial errors.

The argument I encountered at the weekend was, essentially, that in some cases at least, the demand schedule for events tickets is such that the revenue-maximising price results in unsold tickets.

For example, you have a 10,000 seater venue. At £20, you’ll sell 8,000 tickets. At £10.01, you’ll still sell 8,000 tickets. At £10, you’ll sell all 10,000 tickets. Here, you are better off selling at £20 (£160k revenue) than at £10 (£100k revenue), and throwing away 2,000 of the tickets, leaving 2,000 empty seats. How can this be a good thing, I am asked.

At one point in the discussion, I was asserting that demand schedules are usually not like this so it’s not really an issue, and that usually the revenue-maximising price will be the price which gets all the supply distributed to the buyers with the highest demand. But he simply asserted the opposite: that demand schedules are quite often like this. I had no response to that. It would seem to be an issue requiring some empirical evidence.

Or perhaps I was on the wrong track, and it actually IS “a good thing”, in the Austrian perspective, that, given the demand schedules as in the example above, some tickets are unsold and some seats are empty?

2

An option would be to sell as many tix as possible for 30, then suspend that, offer further tickets at 20, then sell remaining tix at 10. For a full stadium

3

I can tell you the way the Boston Symphony Orchestra sells tickets. Some seats are priced differently. The most desired seats are priced at $120, and the least desired seats at $30, and then there are seats priced in between. Then, the day of the concert (but only for certain concerts), tickets can be bough last minute for something like $6 or $8, and those tickets can be in the $120 section or the $30 section. They just move to sell tickets at the end.

Also, don’t forget what hotels do. If you book months in advance, you can get a decent rate, even for times of the year that are normally busy. They are trying to make sure people go. Then, once the hotel realizes that they will indeed have lots of guests for a specific time period, the price goes up with the demand. But, sometimes hotels aren’t renting rooms out as much as they wanted to, so then they will actually lower the price to meet the lack of demand in order to entice people to stay there.

They way you described the Olympics, it sounds like the people running it aren’t running a business that relies on voluntary trade. It sounds like the people running it are doing it behalf of governments. And then they don’t sell tickets. Go figure.

4

For example, you have a 10,000 seater venue. At £20, you’ll sell 8,000 tickets. At £10.01, you’ll still sell 8,000 tickets. At £10, you’ll sell all 10,000 tickets. Here, you are better off selling at £20 (£160k revenue) than at £10 (£100k revenue), and throwing away 2,000 of the tickets, leaving 2,000 empty seats. How can this be a good thing, I am asked.

Well, I don’t know if this accurately describes the demand schedule for the actual olympic games. But given this demand schedule, I think his conclusion makes sense IF we assume that the firm running the olympics can only charge a single price. This shouldn’t be too suprising since this exactly how single-price monopolies work in other situations–they reduce quantity sold to charge a higher price per unit.

But why can’t the firm charge a different price to different types of customers? Real, profit-maximizing sporting arenas do this all the time. They charge higher prices to people who are less sensative to price (say the big fans that want to sit close to the action in comfortable chairs) and lower prices to people that are more sensative price (those that don’t mind sitting in the nose bleed sections in less comfortable seats).

In this case, you could possibly sell the nice seats for $20 and the worst 2,000 seats for $10 (if that is what is making demand look so funky).

This is called third degree price discrimination and it will almost always represent a welfare improvement relative to a single-price monopoly.

So I don’t know if you would call the single-price monopoly outcome “good”, but I do think you could call the price discrimination monopoly outcome “better”.

5

Nir,

Yes, but if it was a regular ticket-seller (i.e. not the Olympics) that might not work, because people would catch on, and potentially many of those who would buy at £30 would hold off for a lower price.

6

If the olympic organizers (or whom ever) are so brilliant to know the demand schedule ahead of time , then why did they build all those extra seats in the first place?

7

Essentially my answer was going to be Student’s. The onus is on your friend to demonstrate that these demand schedules are typical (showing why) and furthermore, that the outcome is “bad” (provided alternatives exist that are demonstrably better.) Nonetheless, price differentiation would allow the seller to maximise revenue in this instance. The Olympics aren’t a very good example of a market at work (guess why) but in such an instance the single-monopolist would be open to competing bids from other vendors who could price tickets more efficiently and therefore garner a greater attendance at the events, which is the organiser’s goal. So in this instance any “blame” could be apportioned to the organiser i.e. the buyer at least in part.

Of course people are always free to exercise choice and not attend, as well. Your friend is doing what many people do and assuming that the utilities of some people outweigh those of others.

8

Why do they do that? Why hold some back for the last minute?

That’s interesting, I didn’t realise that. They are testing the market demand then, in a sense. I would expect then, that hotel room speculators exist, who buy up rooms at the low ‘test price’ to sell on later. Do they exist?

9

Well I am limiting my analysis to a set of homogenous units (tickets), but that’s a given in the definition of supply.

I don’t know what you mean by a single-price monopoly.

That would be two different supplies: comfortable chairs, and less comfortable seats. That’s not what I’m talking about. Assume all seats in these venues are viewed as equally serviceable by everyone. Or assume it’s true of a subset of the venue seats, at least.

10

Ever heard of “last minute deals”, “season-end discounts”, “inventory reduction sales”?

A devoted fan must see a particular event. He would rather pay $30 for a ticket now than wait to see if there will be ten tickets left for sale at $10 on the day of the event.

A businessman must be on the plane to Berlin on Sept 20th. He would rather pay $1000 for a ticket now than wait to see if there will be ten seats available for $500 on the day of the flight.

A fashion addict must have the latest model designer bag. She would rather pay $1000 for it now than wait to see if there will be ten of them left for sale at $200 two months later (and risk not getting one).

A car freak…

11

Well, no one knows the demand schedule ahead of time. But you raise a good point. I think a better way of putting it would be: why was that event booked in such a large venue?

If we made the example more extreme, the demand schedule might be so ‘warped’ that it’d be better to sell one ticket for £200k, rather than 10,000 tickets for £10 each. In that case, I guess you would say the performer (or whatever) should have done a private party-for-one, rather than a stadium gig, and that the venue ought to have been used for some other event with a more typical demand schedule (or if this warped demand schedule is the norm, the stadium should not have been built).

My analysis is incomplete in that it starts from the position that the Olympics is here and all the venues are built, and now it’s time to distribute tickets. This may be an unreasonable place to start.

12

They aren’t holding back any tickets. These low priced tickets are the remaining tickets they were unable to sell. They would rather sell what would normally be a $120 seat for $8 than to not sell it at all.

I don’t know if they exist, but it seems like if it does, it is probably rare. While I can imagine someone speculating and renting the rooms in advance so as to rent them out later himself, I would think that hotels would probably be on the lookout for this, and they probably have policies stating that if they catch you doing this, you pay a fine or forfeit the room.

Though now that I think about it, I wouldn’t be surprised if certain people working in a hotel, such as a manager, tried to do this. After all, the manager is in a good position to hide this activity from the hotel company. The question is, do hotel managers find this to be worth the risk of losing their jobs? I find it doubtful, but I don’t know the hotel industry very well.

13

How would he go about that? Or how would I go about demonstrating that they are not typical?

Absolutely. Compared to what. That was a point I made many times… that alternatives (price controls and such) are no better, and actually worse.

Do you mean price differentiation within the same supply of a good (i.e. not like Student’s example of comfortable and uncomfortable seats)?

Yes, so what I’m saying is that things would have been better (i.e. fewer big fans denied seats, and fewer empty seats) if tickets would have been sold with the sole goal of “maximise revenue” rather than with any other goal (like “make sure some poor people get tickets so the government looks all nice and caring”).

I don’t know what that last sentence means. When is it the organiser’s goal to “garner a greater attendance” per se?

Is he? Where is he doing that? He is saying the organiser’s goal ought to be “sell at the highest price where all the supply is sold” whereas I am saying the organiser’s goal ought to be “sell at the price that maximises profits”.

14

How would he go about that? Or how would I go about demonstrating that they are not typical?

To be brutally honest, he’d need to jump in people’s heads. In the absence of such a means, specifiying the conditions under which such schedules allegedly obtain and showing that they are somehow typical. He won’t be able to because these pricing scenarios are strictly limited to situations where only one supplier of the good exists.

Do you mean price differentiation within the same supply of a good (i.e. not like Student’s example of comfortable and uncomfortable seats)?

Yeah, and that could be buying the same good at different points in time even. I think he was just trying to illustrate a case of it, but it needn’t be a physically dissimilar good.

I don’t know what that last sentence means. When is it the organiser’s goal to “garner a greater attendance” per se?

In this case I am taking the organiser to be the British government. I will admit I am not sure how the various governments involved go about organising the event but when I say organisers I refer to them and any related parties, not necessarily the firms they contract with to sell tickets etc.

Is he? Where is he doing that? He is saying the organiser’s goal ought to be “sell at the highest price where all the supply is sold” whereas I am saying the organiser’s goal ought to be “sell at the price that maximises profits”.

It depends on who the organiser is. If it’s a profit-seeking firm/investor, I’d agree on the above. The government is not directly seeking to maximise returns via the event however. It is indirectly. The whole ticket affair is another typical scenario of government mismanagement in picking suppliers, because ultimately they aren’t maximising returns, when their clients have footed a great deal of money in a stadium that is in large parts unfilled. If the client doesn’t deal with this issue, it isn’t a market failure but a lack of discretion on their own part and to their own detriment. When the client is the government which is not profit-driven, you can expect it.

15

Welcome back Jon, its nice to see you again.

I found an article that might be relevant (no guarantees about its accuracy). http://bastiat.mises.org/2012/07/empty-seats-and-empty-minds-at-the-olympics/

16

Thank you for this. So these are strategies for selling to a higher price to people willing to pay a price, while also selling the exact same product at a lower price to people who are only willing to pay a higher price. I was thinking of prices in a way that was too rigid. These strategies are really very common now I come to think of it.

So a better answer to the scenario would be that the true profit-maximising strategy was not a flat price of £20, but finding some way to discriminate based on price sensitivity so that he could sell 8,000 tickets for £20 (or more) and 2,000 at £10, to fill the venue. So even with an unusual demand curve like this, you’d likely still have all the supply distributed if you have inventive entrepreneurs.

I suppose the next question would be are there any situations where such price discrimination is impossible even for the most inventive entrepreneurs? Or do they only exist in textbooks?

17

With that much difference it sounds more like an entrepreneurial error than a strategy. It would be strategy if they deliberately priced it above the price where they expected to sell all tickets, planning to lower the price later for more price sensitive customers. But going from $120 to $8 sounds like a misjudgement… they lowered the price too slowly.

18

True. The top 10 orchestras in the US don’t rely on ticket sales for the majority of their income. It’s probably just a large minority. This may be why they aren’t more entrepreneurial towards ticket sales. The incentives just aren’t there.

19

little late, but relevant blog post:

Empty Seats and Empty Minds at the Olympics