A sideways look at economics

As anyone that has delved into the murky world of purchasing tickets for events online will be aware, the experience is nothing short of a minefield.

Am I paying a fair price? Is the website genuine? Is it authorised to sell tickets to this event? Will I get refused entry at the venue? Will my ticket arrive on time? All these unknowns could make you question whether it’s worth going at all, but try telling that to die-hard supporters of Korean pop sensations, BTS, who are coming to London in October.

Last month, fans went into meltdown when tickets went on sale. All over the country, eager BTS fans were hunched over their laptops, vigorously pressing refresh on their internet browser in the hope of securing tickets. All part of the fun, some might say, but not for those of us of sound mind. Speaking to a friend following her failure to secure a BTS ticket, her frustration (and despair) were clear, which got me thinking.

Should she, along with thousands of other people, consider purchasing a ticket in the secondary market, where tickets are resold, or should she come to terms with the prospect of not seeing her favourite band live? I know what I would do. But should she decide to go down the route of ticket resales, a notoriously grey area, she would not be alone. According to estimates, the second-hand ticket market in the UK is worth more than £1 billion per year, with music events accounting for roughly half of all ticket resales. According to a recent study by the consumer group Which?, up to 25% of tickets for some events are sold through secondary vendors, having already been sold by the original promoter.

Why is this, and is it indicative of a market failure?

A simple supply and demand diagram suggests that tickets are underpriced, undersupplied, or some combination of the two. Interestingly, some artists claim that if tickets were priced according to market forces, meaning directly related to the price that fans are willing to pay, it would limit access to their shows by pricing out low-income groups. But, as an old Bank of England interview question alludes, there is another, less altruistic, explanation. Showing its vintage, the question goes something like: why would a band such as Oasis deliberately set a low price for its concert tickets, knowing that the venue is guaranteed to sell out multiple times over? The answer, of course, is that it would create a buzz around the event, the publicity of fans queueing, doing anything they can to get their hands on a ticket, as the demand at this price exceeds the supply.

But in pursuing this strategy, bands play into the hands of ticket resellers, or, as they are more affectionately known, touts. Indeed, it presents them with the perfect arbitrage opportunity — the chance to make a quick buck from buying and selling the same good or service in two different markets. Websites such as Viagogo, StubHub, Seatwave and Get Me In! facilitate that process, enabling ticket resellers to extract the consumer surplus (the grey shaded area in the chart below) by charging die-hard fans what they are willing to pay.

By now, regular readers of this blog will know that its authors often have an axe to grind. To be clear, this author’s issue is not the secondary ticket market per se. In fact, by pricing tickets on a “willingness to pay” basis, some might argue that it improves allocative efficiency. Instead, I take issue with the fat cats of the resale industry, taking a proportion of the resale price while charging mammoth handling and booking fees. My only comfort — a crackdown on this rent-seeking behaviour is underway!

A growing number of websites are siding with the consumer and fighting back. Twickets, for example, caps the resale price at face value plus 15%, gaining it favour with the likes of music artist Ed Sheeran, who has been vocal on the topic in the past. In a bid to fight the touts, he has even gone as far as refusing entry to his concerts to those who have purchased tickets from second-hand websites. Another option is to use peer-to-peer websites, which cut out the middle man but are susceptible to fraudulent activity. Although these are steps in the right direction, it is clear that there remains a considerable amount of work to do to level the playing field for fans.