The Irony of Ticket Pricing

Whenever a popular artist or band goes on tour, tickets often sell out on Ticketmaster almost as soon as they go on sale only to show up on secondary marketplaces like Stubhub, sometimes at an astronomical mark-up from their face value. While revenue from ticket sales from primary ticket sellers go toward the the artist and other stakeholders directly, on secondary markets, the additional surplus is captured by the reseller, whether it be a scalper, professional broker or fan trying to make a profit. The question is if prices prevailing on the secondary market are higher holding all else equal, then why don’t the artists set higher initial prices?

Risk aversion may be a contributing factor to lower prices. Artists want to mitigate the risk of being perceived as unfairly gouging their fans and protect their branding as an artist providing a social good. In a model of ticket pricing, Alan Krueger and Marie Connolly (2018) include a discount factor to a consumer’s willingness to pay which is proportional to a ticket’s price. Kahneman (1986) argued that customers value fairness and that the market clearing price may not necessarily be perceived as fair. In addition, concerts are a social good and a full crowd may have positive experiential effects leading artists to under price tickets in certain sections in ways that secure the attendance of more enthusiastic, energetic fans in the audience.

On the other hand, secondary market prices may be pushed higher through an endowment effect whereby people attribute a higher value to goods they have acquired even if the value is trivial. In this regard, those who secure tickets in the primary market may require a substantially higher price to induce them to sell them. Connolly and Krueger (2018) find evidence of this effect and posit that it limits supply of tickets to the secondary market thus driving up prices.

In this way it seems ambiguous whether the shifting of surplus from artists and consumers to sellers in the secondary market is a predatory behavior or if it reallocates tickets more efficiently. Sorenson (2013) states that “the conventional view in economics is that resale is welfare-enhancing, because voluntary trading leads to more efficient allocations.” It may be that only high value seating is under priced in the primary sale and that the secondary sales result in reallocations which naturally correct this by guiding tickets to those with the higher valuations. Using primary and secondary market transaction data covering 56 rock concerts, Sorenson finds a strong association between seat quality and the likelihood of resale. Seats in highest demand were about four times more likely to have tickets resold than low to mid quality seats.

_{^{Note: These views are my own and do not reflect those of my employer or any other organization of which I am a member.}}