Moving From Posted Price To Auction

Lynne Kiesling

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!


13 thoughts on “Moving From Posted Price To Auction

  1. Working among excellent economists who are also rabid Red Sox fans, we recently pondered a similar question as to why Red Sox tickets are allocated in seriously non-price methods. Tickets, as they were doled out slowly, were instantly snatched up by those lucky enough to have been in the magic spot in an electronic queue. Given the relative scarcity of seats in Fenway Park compared to the vast number of ticket-seekers, surely the Red Sox could have made much more money putting the 2.7 million or so tickets for sale on eBay!

    Our ponderings about why this is not the right approach: inertia, transactions costs, value of fan loyalty (we won’t be world champs every year!). We still can’t figure out, though, why even the posted prices are set where they are. Why not charge twice as much for Yankees games, e.g.?

  2. The Milwaukee Brewers will be charging a premium price this season when the Cubs play there.

    As long as Ticketmaster gets their cut from every ticket they process, I don’t see them charging excessively for changing the way that ticket prices are set. Otherwise promoters could come up with some alternative method utilizing the internet. An ID number could be provided that people would use at the concert theater to process their admission (similar to what movie theaters are now doing).

    I can envision a different system for concert ticket pricing. When a concert is first announced, people can bid on the best 500 or so seats. Once that price is established, all of the other seats can be priced at a fraction of that top price, depending on location of the seat. I don’t know what system you would use to give the top bidders first crack at the tickets.

    In my “yute” the premium you paid for an in-demand ticket was how long you could endure staying in line. The sidewalk got mighty cold overnight in front of the Chicago Stadium in Feb. 1977, but I was able to get opening night tickets for Led Zepplin. (It wasn’t the safest place to be at 2 am, but no guts no glory.)

  3. It is an interesting bundle of questions.

    On the question of “Why not charge twice as much for Yankees,” I’ve noted that the Washington Wizards tend to offer discounts for games against less popular teams, as opposed to surcharges for games against more popular teams. I suspect teams make more money with discounts (and higher regular ticket prices) than with surcharges (and lower regular prices).

  4. One of the largest and most logical reasons behind self-inflicted price ceilings on tickets for sports games and concerts is the fact that there is often an inverse relationship between the ability to pay for tickets and how much a person likes the band/team.

    The people who could pay the auction prices for tickets for a U2 concert are also the people who won’t wear a U2 t-shirt, talk up the band’s new album on the internet, buy a magazine just because U2 are on the cover, or even put a poster on their wall. All of those activities contribute to U2 being the biggest band in the world, and none of those activities are going to be done by the 40 yr. olds who are only willing to passively buy a ticket just because 100$ isn’t a lot of money to them.

    If U2 (or any band) stuck to an auction method for tickets, then it would reap a large profit margin on its tickets for a single tour, but lose all of the prestige and revenue that keeps their careers’ going steady. Same thing with the Red Sox, Yankees, et. al. It’s the “working class” who can’t afford tickets who are the ones wearing 200$ of merchandise to the games. No self-respecting, upper-class stock analyst is going to wear a Red Sox ball cap, winter coat, and keychain to work.

  5. One of the largest and most logical reasons behind self-inflicted price ceilings on tickets for sports games and concerts is the fact that there is often an inverse relationship between the ability to pay for tickets and how much a person likes the band/team.

    The people who could pay the auction prices for tickets for a U2 concert are also the people who won’t wear a U2 t-shirt, talk up the band’s new album on the internet, buy a magazine just because U2 are on the cover, or even put a poster on their wall. All of those activities contribute to U2 being the biggest band in the world, and none of those activities are going to be done by the 40 yr. olds who are only willing to passively buy a ticket just because 100$ isn’t a lot of money to them.

    If U2 (or any band) stuck to an auction method for tickets, then it would reap a large profit margin on its tickets for a single tour, but lose all of the prestige and revenue that keeps their careers’ going steady. Same thing with the Red Sox, Yankees, et. al. It’s the “working class” who can’t afford tickets who are the ones wearing 200$ of merchandise to the games. No self-respecting, upper-class stock analyst is going to wear a Red Sox ball cap, winter coat, and keychain to work.

  6. Aren’t there a lot of issues in creating auctions that last over long periods of time?

    I’m not sure how to structure an auction to attain some revenue and efficiency over long periods when you have uncertain demand. Doing a series of mth-auctions wouldn’t necessarily work – if one auction is undersubscribed in that period, no one pays anything. Having a continuous double auction would work, but the concert would need to be very intelligent about releasing blocks of tickets so that they don’t flood the market.

    Are there nice solutions for this problem that I don’t know about?

  7. Selling Tickets

    Lynne Kiesling is one of my favorite bloggers on economic and energy issues. She has a great post wondering why tickets still have face value. Teams make money from attendance in two ways; the money they glean from the ticket…

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