Similarly, to fans the price that a band charges for a show is often considered a reflection of the band’s ethos and fundamentally a part of the experience. Artists want their fans to feel that they are being treated fairly, and they want their fans to contribute to the experience at a concert by singing along, dancing, holding up cellphones, and posting photos on Instagram. Many sporting events as well, including the Super Bowl, had a block party spirit when they first started (and if you have ever attended a tailgate party before a football game, you can relate to this experience).
But over time, entertainment events evolve to behave more like a market and less like a block party. That is, commercial sporting events, concerts, and perhaps other live entertainment events tend to go through a phase where they are more like a social gathering initially, and then over time—because of excess demand and changing expectations of appropriate norms of behavior—they transform to become more of a market, with prices determined by the forces of supply and demand. If an event turns into an impersonal market too quickly, it risks losing its allure and destroying the goose that has the potential of laying the golden egg. I call this “block party economics,” and it is a rational way to build an industry and loyal customer base (although to agents like Marc Geiger, it smacks of rock and roll socialism).
It is not surprising to see tension between the desire to treat customers fairly and the desire to price to whatever the market will bear in a block party economy. This tension often causes the invisible hand of the market to appear to be all thumbs when it comes to setting the price of concert tickets. Some artists hold to the practice of charging fans a reasonable price irrespective of the price that supply and demand would dictate. Musicians can be sensitive. They care about what is said about them on social media. They may also consider it in their economic interest to sacrifice short-term revenue for the sake of long-term longevity and popularity, and perhaps greater profits in the future.
This tension exists in other markets as well. For example, the ride-sharing company Uber faced intense opposition when it introduced surge pricing (i.e., charging a higher price when demand for rides greatly exceeds the supply of drivers in an area), and it has continually adjusted the practice to reduce customers’ sense of moral umbrage. And after a hurricane, states often impose anti-gouging laws for essential goods such as food and lumber.
In concerts, Ticketmaster often assumes the role of the villain to shield performers or promoters from criticism for charging excessive prices. The infamous Ticketmaster service fee, which seems out of proportion to the service actually provided, is a way to channel revenue back to venues or promoters, and indirectly to artists, for tickets that are underpriced.20 Part of Ticketmaster’s business model is to act as a heat shield to protect artists from the reputational fallout from charging a higher price.
Even in a block party economy, market forces cannot be entirely fenced off. If ticket prices are not set with an eye toward balancing supply and demand, the result will be an empty house (if prices are set too high) or a large secondary market where resale prices are much higher than the list value (if prices are set too low). Resistance to congestion pricing, a method for charging drivers a higher price when roads are congested, has left roads from Los Angeles to New York City gridlocked with traffic during rush hour.
When asked about the tension in concert ticket pricing, Richard Thaler, the University of Chicago economist who won a Nobel Prize for his seminal contributions to behavioral economics, observed, “A good rule of thumb is we shouldn’t impose a set of rules that will create moral outrage, even if that moral outrage seems stupid to economists.”21
One indication of the distance that concerts have traveled in the direction of charging market-determined prices is the extent to which ticket prices vary within the venue, from the worst seat to the best seat. It used to be that most shows charged the same price for every seat. But this practice has broken down. As recently as the 1990s, almost half of concerts (weighted by ticket sales) charged the same price for every ticket in the house, from the last row to the front row. In 2017, less than 10 percent of shows had a uniform price.22 Charging a higher price for a seat that is closer to the stage, just like an airline charging a higher price for a first-class seat, is a natural way to price-discriminate and extract the greatest revenue from concert attendees. When the prices vary across good and bad seats, fans self-sort into price tiers (or, equivalently, sections of the venue) based on their willingness to pay.
Artists are increasingly using innovative methods to set concert prices and extract more revenue from fans. For example, some shows have VIP pricing, where prices for the best tickets are set very high, often in excess of $500, and ticket holders are given a unique experience, such as a meet-and-greet session with the band and a photo before the show. Taylor Swift has been on the cutting edge of innovative pricing. As discussed earlier, she implemented a system of loyalty points, where fans can improve their chances of obtaining a ticket if they buy her merchandise or demonstrate their loyalty by donating time. This has proved an effective form of price discrimination—charging a higher price to fans who have a great willingness to pay.
Still, some artists resist bowing to market forces. Ed Sheeran, whose career was boosted by touring with Taylor Swift, made his views clear: “I didn’t want people to pay $170 and get front row tickets and a meet and greet. I hate that shit. The moment you allow a kid with a rich father to have more things than a kid with a poor father, I think that’s just shit.”23 In a similar vein, Tom Petty once remarked, “I don’t see how carving out the best seats and charging a lot more for them has anything to do with rock & roll.”24
Coming off a sixteen-year hiatus from touring, country singer Garth Brooks recently took a novel approach to selling tickets for his recent world tour, which lasted from 2014 to 2017 and encompassed 390 shows in 79 cities. He charged an affordable price, around $70 for all tickets, but he added more and more shows to satisfy demand at that fixed price, often performing two shows a day. Once a show sold 80 percent of its tickets, another show was added, and those in the queue were rolled over for the next show. As Brooks put it, he was “scared to death no one would show up. And then scared to death when they did.” Ticketmaster called this strategy “Garth mode.” Garth mode can be viewed as expanding supply to satisfy demand at a fixed price that is below the profit-maximizing price. “The whole thing was simple,” Brooks said: “Make your capacity exceed your demand.”25 The strategy essentially killed the resale market, as anyone who wanted a ticket at the list price could buy one. A total of 6.3 million tickets were sold, probably the second-most ever after U2’s record 360° tour (7.3 million tickets sold from 2009 to 2011). The downside of Garth mode is that the singer performed more concerts than he would have had he set a market-determined, income-maximizing price. But his fans, rather than scalpers, received the benefit of the lower price and extra performances.
Garth Brooks is the top ticket-selling solo American artist of all time. Although it is not clear whether Garth mode will be deployed by many other artists, the strategy certainly fits with Brooks’s philosophy. “When we come to a city,” he said, “we’re not coming to play; we’re coming to be invited back.” Echoing a theme I have heard from many performers, from journeyman musicians to superstars, Garth Brooks added that he may feel tired while on tour but once he gets onstage, “all of a sudden you’re superman. You feel 25 years old again….You feel like you can fly.”
One of the most successful touring bands of all time, the Grateful Dead, cut out the middleman (i.e., Ticketmaster) and sold tickets directly to their fans.26 Over the years, the band maintained a huge mailing list of their fans, known affectionately as “Deadheads,” to ensure that their most dedicated fans were able to afford a ticket. While the band performed more than 2,300 shows, each performance was unique. Not only was the set list different for almost every show, but even the same son
g was performed differently from show to show to create a unique experience.
Secondary Market
The secondary market for tickets has long fascinated economists. Secondary markets exist for mortgages, automobiles, and stocks and bonds: once initially originated and distributed, products can be resold. But no resale market inspires the ire of consumers quite like the secondary market for tickets for high-demand concerts and sporting events.*1 To learn more about the secondary market for concert tickets, I conducted surveys at more than thirty concerts across the United States in research with Marie Connolly, an economist now at the University of Quebec. On average, we found that about 10 percent of concert tickets are resold through scalpers on the secondary market. But that figure can easily exceed 30 percent for the hottest shows. The average ticket that is resold goes for about 50 percent above the face value, although many tickets are resold below the list price. Prices for seats in the venue are more finely tiered in the secondary market than in the primary market, and there are wide differences in prices for equivalent seats.
There are two main hypotheses for the existence of the secondary market, both of which have some merit. First, initial prices are set too low to balance supply and demand. This is especially the case for the best seats, which are more likely to be resold than seats in the nosebleed section. Second, many fans are uncertain about their plans when tickets go on sale, or are unaware that tickets are being sold, and some seek out tickets close to the date of the event. Both of these problems could be largely prevented if tickets were initially distributed in a different fashion.
Live Nation’s Michael Rapino emphasized that the secondary market is created by mispricing tickets in the first place. He told the 2018 Pollstar Live! audience, “The way to solve the secondary market is to price the house better.” But he also added, “Artists should control ticketing. An artist should price the house however he wants.”27 This is a pragmatic view, because Live Nation and Ticketmaster want to work with Ed Sheeran, Kid Rock, the Red Hot Chili Peppers, Bruce Springsteen, and many other artists who resist market forces in setting ticket prices. Still, it is hard to see why so much money should be left on the table for scalpers, who deploy an army of bots. Scalpers can take in between $1 million and $1.5 million in net revenue for a Springsteen or U2 concert.
A common view among economists, and one that I previously espoused, is that if artists misprice tickets for whatever reason, the secondary market should play a positive role by reallocating tickets to those who value them most. In this spirit, Harvard’s N. Gregory Mankiw once wrote a New York Times column titled “I Paid $2,500 for a ‘Hamilton Ticket.’ I’m Happy About It.”28 Yet landmark research by economists Phillip Leslie and Allen Sorensen convinced me that this view is overly simplistic. A more nuanced view is that scalpers—professional ticket brokers who have no interest in attending events for which they buy up tickets—extract whatever benefits are created from the existence of a secondary market for reselling tickets.29 The fans who attend the events gain very little, and often are worse off, because of reselling activity and intense competition for the initial distribution of tickets.
Ticket brokers play four economic roles: (1) they buy up underpriced tickets and resell them at a profit; (2) they help “price discovery” by pushing ticket prices toward a market-determined equilibrium that balances supply and demand; (3) they reallocate tickets from those who value them at a lower level to those who value them more highly; and (4) they engage in speculation and risk-taking, as they may end up with tickets that sell at a loss or do not sell at all. The first role is generally considered harmful because ticket brokers make it harder for ordinary fans to obtain tickets, while the other roles could produce economic benefits for consumers or promoters. The wasteful competition that takes place between ticket brokers deploying high-speed bots to purchase tickets and ordinary fans is analogous to the activities of high-frequency traders in financial markets, who invest millions of dollars in technology and high-speed connectivity in an arms race to complete trades a nanosecond faster than their competitors, to the detriment of ordinary investors.
Leslie and Sorensen studied fifty-six major concerts performed by the likes of the Dave Matthews Band, Eric Clapton, Jimmy Buffett, Kenny Chesney, Madonna, Phish, Prince, Sarah McLachlan, Shania Twain, Sting, and others to understand the role of ticket brokers. Ticketmaster was the sole distributor of tickets to these events. A total of 1,034,353 tickets were initially sold to the fifty-six shows. The economists hunted down information on which tickets were resold, and at what price and when, from eBay and StubHub, the two largest ticket-reselling platforms at the time. The results indicated that better seats were more likely to be resold, and that ticket reselling was most common close to the day of the event. The average markup over the list price was 40 percent, although a quarter of tickets were resold below their list price.
Analyzing the ticket market is complicated because the behavior of buyers in the primary market is affected by the presence of resellers, and because resellers have multiple economic roles. If ticket brokers can swoop in and buy tickets that they anticipate they can resell at a higher price, it will be more difficult for fans to purchase tickets in the primary market. There are also substantial transaction costs associated with buying a ticket on the secondary market, as anyone who has paid the StubHub transaction fee can attest. Leslie and Sorensen built a sophisticated model of consumer and broker behavior to model the effect of resale markets on consumer welfare. They reached the provocative conclusion that while the opportunity to resell tickets on the secondary market does increase the allocative efficiency of ticket distribution (which is why Mankiw felt better off for being able to buy a ticket to Hamilton), this benefit is partly offset by increased competition for tickets in the primary market and by transaction costs in the secondary market. When the dust settles, the big winners are the professional ticket brokers. As a whole, fans are likely made worse off by the existence of the resale market. Leslie and Sorensen conclude, “If the narrow goal is to maximize the surplus of those who ultimately attend the event, then restrictions on resale may be warranted.”
In other words, it is not irrational or contrary to economic wisdom for artists or lawmakers to take steps to constrain ticket resellers and squash the secondary market to help fans. Because many artists do not want to price their tickets to market, some strange practices arise in the market for tickets that do not exist elsewhere. For example, Ticketmaster often limits purchasers to only four tickets, in a (mostly futile) attempt to restrict ticket brokers. Apart from wartime rationing or command-and-control economies like Venezuela, rationing of goods is not the norm in a market.
The most obvious way to avoid underpricing of tickets, compared to the secondary market, is to hold an auction for tickets. Ticketmaster tried this strategy for a limited number of premium tickets for hundreds of concerts in the early 2000s, but abandoned it after 2011. The auction mechanism that Ticketmaster used was a variant of the type of position auction that Google implements for keyword advertising. Research by economists Aditya Bhave and Eric Budish found that the auctions solved the pricing problem: tickets sold for about twice what their face value would have been, and at about the same price for which they could be purchased in the secondary market.30 But the auctions proved to be cumbersome and an inefficient means to distribute tickets.
Short of setting the face value of tickets at the market-determined price, artists and ticket distributors are experimenting with alternatives to preclude scalpers—and, as shown in Figure 6.1, list prices have moved rapidly in the direction of the market price, which should erode the secondary market as well. A development that Ticketmaster has deployed to sell tickets to Springsteen on Broadway and for presales for tours by Taylor Swift, U2, and Pearl Jam is called “Verified Fan.” Potential ticket purchasers must register at Verified Fan ahead of time and receive a code that gives them the opportunity to purchase tick
ets. Ticketmaster “analyzes every registrant to make sure they are real people interested in going to the show.”31 Although its algorithm is secret, Ticketmaster will not verify a fan who applies for a ticket for every show date of a tour, for example. The objective of the algorithm is to prevent bots and brokers from buying and reselling tickets. Once purchased by a verified fan, tickets can be resold on Ticketmaster’s platform from one verified fan to another (which generates more transaction fees that Ticketmaster can divvy up). In essence, the Verified Fan system turns fans into scalpers, so the rents from pricing below market accrue to true fans—who either attend the event or resell their tickets to other registered fans—as opposed to professional ticket brokers.
Like an airline checking in passengers, under the Verified Fan system venues check to make sure that the legitimate ticket holder attends the event. Although ticket brokers may find ways to circumvent Verified Fan, so far the procedure seems to be working as intended. Ticketmaster reports that 95 percent of fans who purchase tickets through Verified Fan do not resell them.32 It is likely that many artists will follow this model.
Taylor Swift is a pioneer in taking Verified Fan one step further. Your chance of receiving a code that enables you to purchase a ticket is boosted if you have demonstrated your loyalty to the artist, such as by purchasing her albums or merchandise, engaging with sponsors through social media, or watching her music videos. This approach accomplishes two goals: First, it enables Ms. Swift to price-discriminate by favoring fans who purchased her complementary products with a better chance of obtaining a concert ticket. Those fans who are willing to pay the most to attend her shows, as demonstrated by buying her albums or merchandise, for example, are moved to the front of the queue to buy concert tickets. This is a brilliant and subtle approach to maximize revenue and sell more merchandise. Second, the technology enables the artist and her sponsors to interact more directly with her fans.
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