Institutional change is a slow process, rife with inertia, rent seeking, status quo bias, and transaction costs. Ray Gifford commented yesterday on an illustration of inertia: the persistence of “face value” on concert tickets. Ray tells of dissatisfaction with U2’s fan club pre-sale of concert tickets, wonders why tickets still even have “face values”, and wonders the same thing that I’ve wondered before:
In this age of Internet commerce, my question is why tickets have a “face value” at all any more? Why aren’t all tickets auctioned off over the Internet? We know that a properly constructed and conducted auction will yield an equilibrium that maximizes efficiency for both producers (rock bands, baseball teams, theater owners) and consumers (rock/sports/theater fans). By contrast, the “set price” method now used for allocating tickets suffers from at least two problems: …
A good paper that gets at the comparison of the posted offer pricing institution with a double-auction (buyers submitting bids and sellers submitting offers) is Jon Ketcham, Vernon Smith, and Arlington Williams, “A Comparison of Posted-Offer and Double-Auction Pricing Institutions,” Review of Economic Studies 51 (1984), pp. 595-614. Ketcham et. al. find that “prices tend to be higher and efficiency lower in posted-offer markets relative to double-auction markets”; they also find that sellers used posted-offer prices as signalling devices, in attempts at tacit collusion. Tacit collusion is harder to achieve in a double-auction environment, largely due to the ability of buyers to communicate their willingness to pay (and their tendency to shade their bids, in combination with the tendency of the sellers to up their offers). The double-auction institution empowers buyers in ways that the posted-price institution does not.
Ray then asks why the face value/posted-price system persists for tickets, even though transaction costs for using a double-auction institution to exchange them have fallen. That’s a good question. I think it’s a combination of inertia, status quo bias, and rent seeking. And I’m as skeptical of Ticketmaster as he is, so I don’t rule out some serious rent seeking on their part!