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The Welfare Effects of Ticket Resale
Abstract
We develop an equilibrium model of ticket resale in which buyers' decisions in the primary market, including costly efforts to "arrive early" to buy underpriced tickets, are based on rational expectations of resale market outcomes. We estimate the parameters of the model using a novel dataset that combines transaction data from both the primary and secondary markets for a sample of major rock concerts. Our estimates indicate that while resale improves allocative efficiency, half of the welfare gain from reallocation is offset by increases in costly effort in the arrival game and transaction costs in the resale market.
... The net effect on consumer surplus is unclear. Leslie and Sorensen (2009) use data from major rock concerts to estimate that frictionless resale markets would lower surplus for concert attendees, now faced with higher prices. The analysis is, however, developed in a partial equilibrium framework, neglecting the response of promoters to changes in those markets. ...
... Courty (2003a), once again, argues that promoters may gain from intertemporal price discrimination and capture surplus from late buyers with high product valuation, but only in the absence of scalper competition. In contrast, Leslie and Sorensen (2009) point out that while in the past promoters have lobbied against resale activity, the current trend is for them to accept or even endorse it. Karp and Perloff (2005) hypothesize that scalpers may be in a better position to incur small transaction costs, exploring personalized interactions to distinguish between consumers with different willingness to pay. ...
... Assessing the relevance of heterogeneous discount rates would prove valuable in further characterizing this environment. Leslie and Sorensen (2009) provide some compelling data to motivate this. Using an extended sample of concerts and artists they find that tickets usually go on sale 3 months before the event date and that a striking 64% of purchases in the primary market, including most of those from brokers and scalpers, take place in the very first week. ...
Ticket scalping is frequently related to the economic puzzle of underpricing by promoters. It is also disputed whether event promoters benefit from scalper participation or not. Our article explores two questions: can promoters benefit from scalpers' activities and what are the resulting consumer welfare effects? We address these questions by developing a three period game where the secondary market is supported by an auction mechanism, interacting with primary market decisions. We find that participation by scalpers can lead to underpricing in the primary market and that this may benefit small or credit-constrained promoters. This requires the scalper's discount factor to be higher than the promoter's discount factor. The necessary premium on the discount factor increases with the fraction of early buyers and decreases with market size. Finally, the effect of scalper participation on aggregate consumer welfare is shown to be positive for a large enough market size or discount rate for the scalper.
... The conclusion that prices are determined dynamically may also have important implications for how secondary market data is used to assess the welfare consequences of allowing resale. For example, Leslie and Sorensen (2009) estimate the welfare effects of allowing the resale of event tickets, under the assumption that secondary market prices are determined by one-shot market clearing, consistent with the assumptions of the related theoretical 5 Former American Airlines CEO Robert Crandall described Revenue Management as "single most important technical development in transportation management since we entered the era of airline deregulation in 1979." 6 Some large ticket brokers told me that they use 'rules of thumb' that reflect dynamic considerations in setting prices. ...
... To provide a final illustration that prices are falling because of dynamic considerations rather than changes in the static environment, I use the estimated opportunity costs to calculate the price that each seller would set if, whenever he lists, he faced the residual demand curve implied by the coefficients for 11-14 days before the game and the average level of competition observed 11-20 days before the game, so that changes in competition are excluded as well. 34 Table 4 shows that counterfactual prices, which differ across periods only because of changing opportunity costs, decline by similar amounts to observed prices. This shows that sellers only cut prices because of dynamic pricing considerations. ...
... In this specification, the residual demand curves are also similar across time periods and counterfactual prices are close to observed prices (see Sweeting (2009)). 34 The use of mean values results in counterfactual prices being slightly different to those observed even for listings posted 11-14 days before the game. 35 In period t he chooses a price pit to maximize pitQit(pit) ...
A perishable good seller typically has a fixed number of units to sell, as well as limited time in which to sell them. This creates incentives to price dynamically, and in particular, to cut prices as future selling opportunities disappear. I use data from secondary markets for MLB tickets to show that sellers behave in the way that theory predicts. They cut prices significantly, by 60% or more in the final month before a game, and these price cuts are explained by dynamic incentives, rather than changes in demand or competition. Dynamic pricing is valuable, increasing expected revenues by 24%.
... Anecdotal evidence of speculators is aplenty whether in event tickets (as in the World Cup), electronic gadgets or big ticket items such as real estate (see Leslie and Sorensen (2010) for a market overview of the ticket resale industry). ...
... In an upward market (v 1 < E(v 2 )), the optimum price, sales in Period 1, and the expected resale price (and seller's expected price) in Period 2 are given as follows. 22 Condition ...
... Firstly, the myopic consumers are inevitably priced out of the (advance) market in an upward market. As a consequence, as the seller clears the entire capacity 22 Recall that E(p * 2 ) = E(p * s ) so we only show E(p * 2 ) in the table. σ is such that H(K − W − β(σ )) = 0,σβ is given in Lemma 3.1 and Φ1(k, σ) is given in (4). ...
This article examines the pricing policy of a monopolist seller who may sell in advance of consumption in a market that comprises of myopic consumers, forward-looking consumers, and speculators. The latter group has no consumption value for the goods and is in the market with the sole objective of making a profit by reselling the purchased goods shortly after. Consumers, although homogeneous in terms of their valuations, are different with respect to their perspectives. We show that in an “upward” market where the expected valuation increases over time, the optimal pricing policy is an ex ante “static” one where the seller “prices into the future” and prices the myopic consumers out of the advance market. However, in a “downward” market where the expected valuation decreases over time, the seller adopts a dynamic pricing strategy except for the case when higher initial sales can trigger more demand subsequently and when the downward trend is not too high. In this case, the seller prefers an ex ante “static” pricing strategy and deliberately prices lower initially to sell to speculators. We identify the conditions under which the seller benefits from the existence of speculators in the market. Moreover, although the presence of entry costs is ineffective as an entry deterrence, we determine the conditions under which exit costs can rein in speculative purchase.
... On the other hand, resale markets generate $3 billion each year in the US, and this number is expected to grow over the next several years (Mulpuru et al., 2008). For popular concerts, the resale market revenue can be as much as 37% of the primary market revenue, and 46% of the resale activity is generated by consumers (Leslie and Sorensen, 2011). Consumer resale is prevalent in event ticket sales for the following reasons. ...
... Moreover, I study a general ticket options model and show that options help event capacity providers capture more resale market revenues. Leslie and Sorensen (2011) study a similar problem empirically and find that while consumer resale improves allocative efficiency, some of the welfare gain from reallocation is offset by increases in efforts and transaction costs in the resale market. Moller and Watanabe (2010) briefly study 9 consumer resale with price commitment and with period 1 arrivals only. ...
This dissertation studies several strategic-level pricing decisions of firms that are motivated by recent changes of pricing policies in several service industries. It consists of three essays, each analyzing a different problem of selecting the optimal pricing policy for firms in a certain service industry. All three essays contribute to the arising areas of strategic-level revenue management and consumer-driven operations management.
The first essay studies whether preventing resale of tickets benefits the ticket providers for sporting and entertainment events. Different from what common wis- dom may suggest, I find that this event organizers can benefit from reductions in consumers??? (and speculators???) transaction costs of resale in many cases. Further, I propose ticket options (where consumers would initially purchase an option to buy a ticket and then exercise at a later date) as a novel ticket pricing policy, and show that ticket options naturally reduce ticket resale and increase event organizers??? revenues.
The second essay studies a conditional upgrade strategy that has recently become common in the travel industry. A consumer can accept a conditional upgrade offer after making a reservation and pay the fee to upgrade at check-in if the higher-quality product type is still available. I identify multiple benefits of conditional upgrades including demand expansion, price correction, and risk management. Moreover, I find that using conditional upgrades can generate higher revenues than having the ability to optimize product prices and use dynamic pricing.
The third essay studies the firm???s strategic decision of whether to bundle the an- cillary service (e.g., baggage delivery) into the main service (e.g., air travel) or to unbundle and charge separate prices. I find that a firm that can price-discriminate when selling the main service should unbundle the ancillary service because con- sumers??? likelihoods of purchasing the ancillary service are low, or a large proportion of consumers are myopic instead of forward-looking, or the firm is dependent on inter- mediaries to make sales. I also find that the firm???s ability to price-discriminate when selling the main service reverses some classic bundling results for a uniform-pricing firm.
... Schimmelpfennig (1997) estimated demand curves for different seat categories from nine performances of two London ballets to ascertain whether revenue-maximizing prices were being charged. Leslie and Sorensen (2009) examined the welfare effects of ticket re-sales for rock concerts. None of these studies addresses the impact on revenue from adopting a multi-tiered pricing strategy, as we do in this article. ...
We provide empirical estimates of the revenue benefits of multi-tier pricing at a major US pop music venue. Our unique sample includes data on the number of tickets sold at every price. Mean revenue gain from multi-tier pricing is estimated to be about $20,000 per show, a 4.2% increase over uniform pricing, although the gains were as high as 21.2% for one performer. We also provide evidence that customer segmentation by income is a likely motive of multi-tier pricing and, for the first time, that the standard assumption of zero marginal cost of additional venue attendees is valid.
... In the present study, the consumer surplus loss to high-income fans of about $1.94 million ($17.63 per ticket) is more than twice the gain of about $902,000 to low-income fans ($9.26 per ticket). Our results are consistent with those of Leslie and Sorensen (2009), who find that ticket re-sellers obtain the largest surplus from high willingness-to-pay consumers. ...
We estimate consumer surplus gains and losses from concert ticket price discrimination. Fans purchasing low-priced tickets enjoy a surplus gain of about 17.63 per ticket.
... (b) why do the majority of artists use only two price categories? 29 The evidence suggests that artists leave money on the table, which is consistent with the observation that resale markets are to a large extent fueled by arbitrage opportunities due to un-priced quality differences within ticket categories (Leslie and Sorensen, 2008). This is an interesting issue for future research. ...
Given falling birth rates, ageing baby boomers approaching retirement age as well as a pension crisis in most advanced economies, understanding the characteristics of the labour supply function of the elderly have taken on a new significance. Even in developing countries, with labour surplus economies, this is a major issue as these poor countries try to build a pension scheme with at least a minimum amount of state provision for the elderly. What motivates retired people to enter or continue in the labour force is the focus of our analysis. We use panel data from Korea which is an interesting country since it transited from developing to developed economy status within the last few decades and therefore exhibits characteristics of both underdevelopment and economic advancement. The econometric methods include probit models of: pooled data; panel data with random effects; and 2SCML, to allow for possible endogeneity bias induced by the self-declared health status of the elderly. We stress the crucial importance of pecuniary and non-pecuniary factors in determining labour supply of the elderly. Contrary to expectations, non-pecuniary factors such as health status are crucial in the decision-making process of whether to work or not to work for the elderly.
... For example, Stubhub.com became the official resale site for MLB in 2008. The existing theoretical (Courty (2000Courty ( , 2003a), Karp and Perloff (2005)) and empirical (Leslie and Sorensen (2007)) literatures analyze these markets using one-shot market clearing models. My analysis provides insights into how the price formation and allocation 4 An alternative objection is that declining prices would provide sellers with short-selling opportunities: a seller would sell a pledge to provide a ticket a long time before the game before buying the ticket closer to the game at a lower price. ...
This paper analyzes the dynamics of prices in two online secondary markets for Major League Baseball tickets. Controlling for ticket quality, prices tend to decline significantly as a game approaches. The paper describes and tests alternative theoretical explanations for why this happens in equilibrium, considering the problems of both buyers and sellers. It shows that sellers cut prices (either fixed prices or reserve prices in auctions) because of declining opportunity costs of holding onto tickets as their future selling opportunities disappear. Even though prices can be expected to fall, the majority of observed early purchases can be rationalized by plausible ticket valuations and return to market costs given product differentiation and uncertainties about ticket availability.
Market studies research has posited the reciprocity of markets making exchanges and exchanges making markets. In this paper, we assess the impact of digitalizing on exchanges and markets. We present a case study on concert-ticket resale, in which the object of exchange (the ticket) is at least stable, but the methods of exchange are changing significantly, partly to attach or detach some contested quality to the exchange, and partly in the tussle over the distribution of costs and benefits. Focusing on the secondary market for concert tickets, we find it is enabled, contested and made problematic for individual actors and in public policy by thoroughgoing digitalization, unsettling a prior balance of logics of scale, scarcity and fairness. Digitalization of the market actors and devices shapes and reconfigures this mundane market setting and we show a process of configuration whereby novel social, technological and market agencing takes place.
Tickets to sporting events are highly differentiated seat location, date and time of the game, and home-team and opponent qualities make each ticket unique. Preferences also differ nontrivially across fans, all of which make the supplier's pricing problem complex. We examine strategies employed by Southeastern Conference (SEC) universities in pricing their football tickets and evaluate their effectiveness in extracting surplus from fans. We use hedonic analysis of data collected from online secondary market transactions to construct a synthetic season ticket, which we compare to prices actually charged by university athletic departments. We also compare quality premiums charged by universities for better seats with market evaluations of those quality differences.
We are interested in whether preventing resale of tickets benefits the capacity providers for sporting and entertainment events. Common wisdom suggests that ticket resale is harmful to event organizers' revenues, and event organizers have tried to prevent resale of tickets. For instance, Ticketmaster recently proposed paperless (nontransferrable) ticketing, which would severely limit the opportunity to resell tickets. We consider a model that allows resale from both consumers and speculators with different transaction costs for each party. Surprisingly, we find that this wisdom is incorrect when event organizers use fixed pricing policies; in fact, event organizers benefit from reductions in consumers' (and speculators') transaction costs of resale. Even when multiperiod pricing policies are used, we find that an event organizer may still benefit from ticket resale if his capacity is small. Although paperless ticketing is suggested as a way to reduce ticket resale and prevent speculators from buying tickets, our results suggest that it may reduce the capacity providers' revenues in many situations. Instead, we propose ticket options as a novel ticket pricing mechanism. We show that ticket options (where consumers would initially buy an option to buy a ticket and then exercise at a later date) naturally reduce ticket resale significantly and result in significant increases in event organizers' revenues. Furthermore, since a consumer only risks the option price (and not the whole ticket price) if she cannot attend the event, options may face less consumer resistance than paperless tickets.
This paper was accepted by Serguei Netessine, operations management.
An existing theoretical literature finds that frictionless resale markets cannot reduce profits of monopolist producers of perfectly durable goods. This paper starts by presenting logical arguments suggesting this finding does not hold for goods consumers tire of with use, implying the impact of resale is an empirical question. The empirical impact is then estimated in the market for video games, one of many markets in which producers may soon legally prevent resale by distributing their products digitally as downloads or streamed rentals. Estimation proceeds in two steps. First, demand parameters are estimated using a dynamic discrete choice model in a market with allowed resale, using data on new sales and used trade-ins. Then, using these parameter estimates, prices, profits, and consumer welfare are simulated under counterfactual environments. When resale is allowed, firms are unable to prevent their goods from selling for low prices in later periods. The ability to do so by restricting resale outright yields significant profit increases. Renting, however, does not raise profits as much due to a revenue extraction problem.
We document the existence of pricing styles in the concert industry. Artists differ in the extent to which they rely on second- and third-degree price discrimination and in how likely they are to sell out concerts. Most strikingly, artists who use multiple seating categories are more likely to vary prices across markets and less likely to sell out concerts. These patterns are difficult to explain under a standard profit maximization paradigm. The hypothesis that artists differ in their willingness to exploit market power provides a plausible framework for explaining these patterns in artist pricing style.
We investigate how posted prices affect consumers' willingness-to-pay (WTP) for real-world products by eliciting the WTP from experienced consumers for water-resisting handbags and consumer electronics accessories before and after people see the price tag. To control for possible experimental artifacts, we elicit WTP with the following procedure: The incentive compatible Becker, DeGroot, Marschak (BDM) mechanism, explanations of the optimal strategy under BDM (truthfully revealing one's valuation), and paid practice rounds with subjects switching roles between buyers and sellers. Though this procedure has successfully minimized the willingness-to-pay and willingness-to accept gap in the literature (which we indeed replicate), we find a moderate but significant increase in WTP for the majority whose initial WTP were lower than the price tag, and a sharp decrease in WTP among the few whose initial WTP were higher than the price tag. This suggests a price effect driven by information regarding potential resale (and repurchase) opportunities. A similar laboratory experiment with college students replicates these findings. This suggests that when firms determine prices or discounts, they might have to care more about the negative "outside-opportunity" effect of low prices instead of the positive "price placebo" effect commonly observed in more controlled environments.-Ping Bai provided excellent research assistance.
Tickets to sporting events are highly differentiated - seat location, when the game is played, and home team and opponent qualities make each ticket unique. Preferences also differ nontrivially across fans, all of which make the supplier’s pricing problem complex. We examine strategies employed by Southeastern Conference universities in pricing their football tickets, and evaluate their effectiveness in extracting surplus from fans. We use hedonic analysis of data collected from online secondary market transactions to construct a synthetic season ticket, which we compare to prices actually charged by university athletic departments. We also compare quality premiums charged by universities for better seats with market evaluations of those quality differences.
Although most economists assume that ticket scalping is efficient, existing theoretical models make ambiguous predictions of the effect of ticket resale on production and attendance. This study uses variation in state and municipal laws to examine whether prohibiting or restricting resale has a positive or negative impact on consumer attendance and producer entry into arts markets. Our results show that restrictions on resale prices and license requirements stimulate attendance in performing arts events, but decrease the number of unique productions. This suggests that consumers value regulation that restricts prices and requires licensing for resellers over greater variety in productions.
This paper analyses, in a simple two-region model, the undertaking of noxious facilities when the central government has limited prerogatives. The central government decides whether to construct a noxious facility in one of the regions, and how to …nance it. We study this problem under both full and asymmetric information on the damage caused by the noxious facility in the host region. We particularly emphasize the role of the central government prerogatives on the optimal allocations. We …nally discuss our results with respect to the previous literature on NIMBY and argue that taking into account these limited prerogatives is indeed important.
Concert tickets can either be sold at a single price or at different prices to reflect the various levels of seating categories available. Here we consider how two product characteristics (the artist's age and venue capacity) influence the likelihood that pop music concert tickets will be sold at different prices. We argue that valuation heterogeneity, and thus the returns to using price discrimination, are higher for older artists and in larger venues. We test this hypothesis in a large dataset of concerts. By singling out variations in the two characteristics that are exogenous to the decision to price discriminate, we show that these characteristics have a large and significant impact on the use of price discrimination.
This paper provides structural parameter estimates of a model of optimal price speculation by a middleman in the steel market. The middleman profits by purchasing large quantities of steel from producers and other middlemen in the wholesale market and subsequently reselling smaller quantities to individual customers in the retail market. The econometric challenge is to make inferences about the law of motion governing wholesale prices given that these prices are endogenously sampled, i.e. we only observe market prices on the days when the middleman purchases steel. Since the essence of profitable speculation is to "buy low and sell high", the middleman purchases steel relatively infrequently at prices that are presumably lower than those on other days. To avoid misleading inferences, a standard approach to this "selectivity bias problem" is to use a conditional likelihood function that "integrates out" prices on the days when no purchases are made. However since the middleman purchases steel on only 200 of the 1500 business days in our data set, the conditional likelihood approach is cumbersome since it requires multivariate integration over 1300 dimensions. We propose a less efficient but simpler and computationally tractable simulated minimum distance (SMD) estimator to estimate the structural parameters in the presence of endogenous sampling. The SMD estimator minimizes a quadratic form specifying the distance between sample moments and predicted moments from simulations of our model. We show, via a limited Monte Carlo study, that the SMD estimator yields accurate and unbiased estimates of the structural parameters (including the law of motion of the wholesale price process). We use the SMD estimator to estimate the unknown parameters of the middleman's profit function and the wholesale price processes governing two specific types of steel plate. While our commodity price speculation model is formally rejected by goodness of fit tests, the model provides a good approximation to the middleman's trading behavior. Via in-sample comparisons, we find that the optimal trading rule results in only 10 to 20 percent higher profits than those actually earned by the middleman.
This paper investigates the relationship between state level anti-ticket scalping laws and online ticket scalping by examining transactions for National Football League tickets completed on eBay between 2002 and 2005. Despite limited enforcement of regulations in online marketplaces, the evidence suggests that ticket resale regulations do affect the structure of trade online. Stricter regulations were associated with fewer online transactions, a greater frequency of transactions that crossed state borders, as well as higher prices and markups in the secondary market. The evidence suggests that regulations may create significant opportunities for ticket scalpers to capture rents, and these opportunities seemed to be greatest in states that require resellers to be licensed. Over the time period studied, prices and quantities observed in states strictly prohibiting resale above face value became more similar to those observed in unregulated states. These observations are consistent with the idea that market participants updated their beliefs over time about the probability that scalping laws would be enforced online.
This paper examines the value effects of improvements in the trading mechanism. Selected stocks on the Tel Aviv Stock Exchange were transferred gradually from a daily call auction to a mechanism where the call auction was followed by iterated continuous trading sessions. This event was associated with a positive and permanent price appreciation. The cumulative average market-adjusted return over a period that started five days prior to the announcement and ended 30 days after the stocks started trading by the new method was approximately 5.5%. In addition, we find positive liquidity externalities (spillovers) across related stocks, and improvements in the value discovery process due to the improved trading method. Finally, there was a positive association between liquidity gains and price appreciation.
We present a model in which the microstructure of trade in a commodity or asset is endogenously determined. Producers and consumers of a commodity (or buyers and sellers of an asset) who wish to trade can choose between two competing types of intermediaries: "middlemen" (dealer/brokers) and "market makers" (specialists). Market makers post publicly observable bid and ask prices, whereas the prices quoted by different middlemen are private information that can be obtained only through a costly search process. We consider an initial equilibrium with which there are no market makers but there is free entry of middlemen with heterogeneous transactions costs. We characterize conditions under which entry of a single market maker can be profitable even though it is common knowledge that all surviving middlemen will undercut the market maker's publicly posted bid and ask prices in the postentry equilibrium. The market maker's entry induces the surviving middlemen to reduce their bid-ask spreads, and as a result, all producers and consumers who choose to participate in the market enjoy a strict increase in their expected gains from trade. When there is free entry into market making and search and transactions costs tend to zero, bid-ask spreads of all market makers and middlemen are forced to zero, and a fully efficient Walrasian equilibrium outcome emerges.
The authors study dispersion in the prices an airline charges to different passengers on the same route. This variation in fares is substantial: the expected absolute difference in fares between two passengers on a route is 36 percent of the airline's average ticket price. The pattern of observed price dispersion cannot easily be explained by cost differences alone. Dispersion increases on routes with more competition or lower flight density, consistent with discrimination based on customers' willingness to switch to alternative airlines or flights. The authors argue that the data support models of price discrimination in monopolistically competitive markets. Copyright 1994 by University of Chicago Press.
This paper studies the case of a monopolist who sells tickets to consumers who learn new information about their demands over time. The monopolist can sell early to uninformed consumers and/or close to the event date to informed ones, or it can ration tickets and allow ticket holders to resell. I show that rationing and intertemporal sales are never optimal. More surprising, the monopolist cannot do strictly better by allowing resale. I discuss the implications of the model for the pricing practices observed in ticket markets.
This paper investigates the impact of anti-scalping laws on the face value of tickets in professional football and baseball. Previous theoretical models have suggested that scalpers might cause an increase in prices at the ticket window because they represent an increase in demand. This paper provides a model in which ticket scalping has an ambiguous impact on ticket window prices, making the actual impact an empirical question. Empirical analysis suggest that in cities with anti-scalping laws average per-game season ticket prices are approximately 10 greater in football. Anti-scalping laws actually increase team revenues, as the laws have no adverse effect on attendance. Thus, event promoters might have sufficient pecuniary incentive to tacitly or explicitly support anti-scalping legislation. Copyright Springer Science+Business Media B.V. 2007
Community standards of fairness for the setting of prices and wages were elicited by telephone surveys. In customer or labor markets it isacceptable for a firm to raise prices (or cut wages) when profits arethreatened, and to maintain prices when costs diminish. It is unfair toexploit shifts in demand by raising prices or cutting wages. Several market anomalies are explained by assuming that these standards of fairness influence the behavior of firms. Copyright 1986 by American Economic Association.
What determines how trade in a commodity is divided between privately negotiated transactions via "middle men" (dealer/brokers) in a telephone or "dealer market" versus transactions via "market makers" (specialists) at publicly observable bid/ask prices? To address this question, we extend Spulber's (1996a) search model with buyers, sellers, and price setting dealers to include a fourth type of agent, market makers. The result is a model where market microstructure -- the division of trade between dealers and market makers -- is determined endogenously. In Spulber's model, dealers are the exclusive avenue of exchange, and prices are private in the sense that price quotes can only be obtained through direct contact (e.g. telephone calls) to individual dealers. In contrast a market maker can be conceptualized as operating an exchange that posts publicly observable bid and ask prices. In our model buyers and sellers can either trade with the market maker at the publicly posted bid/ask price or they can search for a better price in the dealer market. We show that the entry of a monopolist market maker can be profitable if it has a lower marginal cost of processing transactions than the least efficient middle man in the equilibrium without market makers. If this is the case the entry of a market maker segments the market; the highest valuation buyers and the lowest cost sellers trade with the market maker and the residual set of intermediate valuation buyers and sellers search for better prices in the dealer market. Dealers act as a "competitive fringe" that undercut the bid/ask spread charged by the monopolist market maker. However less efficient dealers are driven out of business. The remaining dealers are still profitable although the entry of a monopolist market maker significantly reduces their profits and bid-ask spreads. Thus, entry by a marker maker results in uniformly higher surpluses for buyers and sellers and higher trading volumes. When there is free entry into market making and market makers' marginal costs of processing transactions tend to zero, bid-ask spreads converge to zero and a fully efficient Walrasian equilibrium outcome emerges.
A large number of brokers and scalpers resell a significant fraction of event tickets at substantial markups and they manage to do so despite the fact that promoters and ticketing agencies do not support resell for profits and often attempt to block secondary market. Why can't promoters capture the profits from secondary markets or at least deter brokers from doing so? I present a simple explanation that borrows from the literature on airline ticket pricing and draw parallels with that literature. I review some evidence consistent with this explanation.
A wine-loving economist we know purchased some nice Bordeaux wines years ago at low prices. The wines have greatly appreciated in value, so that a bottle that cost only 200 at auction. This economist now drinks some of this wine occasionally, but would neither be willing to sell the wine at the auction price nor buy an additional bottle at that price. Thaler (1980) called this pattern—the fact that people often demand much more to give up an object than they would be willing to pay to acquire it—the endowment effect. The example also illustrates what Samuelson and Zeckhauser (1988) call a status quo bias, a preference for the current state that biases the economist against both buying and selling his wine. These anomalies are a manifestation of an asymmetry of value that Kahneman and Tversky (1984) call loss aversion—the disutility of giving up an object is greater that the utility associated with acquiring it. This column documents the evidence supporting endowment effects and status quo biases, and discusses their relation to loss aversion.
We present a demand system for tied goods incorporating dynamics arising from the tied nature of the products and the stockpiling induced by storability and durability. We accommodate competition across tied good systems and competing downstream retail formats by endogenizing the retail format at which consumers choose to stockpile inventory. This facilitates measurement of long-run retail substitution effects and yields estimates of complementarities within, and substitution across, competing systems of tied goods. We present an empirical application to an archetypal tied goods category: razors and blades. We discuss the implications of measured effects for manufacturer pricing when selling the tied products through an oligopolistic downstream retail channel and assess the extent to which retail substitution reduces channel conflict.
Scalpers, as market specialists, may improve ticket-producing firms’ revenues, and the ticket market, when scalpers are relatively limited in number. Thus, both scalpers and firms may have a joint interest in public “scalper regulation” that enhances joint market power. Other market participants may also benefit from a more orderly market.
For a seller that markets event tickets both in advance and on spot, a concern is that ticket resale may hurt its profitability. The conventional wisdom is for the seller to consider completely banning resale if possible. This article considers an alternative strategy in which resale is only partially restricted; specifically, resale is banned on spot but still allowed in advance. Using a two-period model in which buyers have discreet valuations, the authors show that it is possible for partial resale to outperform no resale (and also unrestricted resale at the other extreme) in terms of seller profitability when the following conditions hold: when the seller has limited capacity, when the number of high-valuation buyers is small enough, and when the number of early arrivers is not too large. An implication of this research is that when consumers conduct advance and spot resale in different channels, such as advance resale online and spot resale offline, the seller may be better off adopting different resale policies for different channels.
This paper examines the relationship between chronic excess demand for sporting events, a robust ticket resale market and the market for seasons tickets. The main argument focuses on property rights associated with the purchase of season tickets. Given the impossibility of pricing games individually, season-ticket holders act as brokers. The ‘broker's fees’ are paid in the form of priorities for playoff tickets and premium seats in future years. Since a pure monopoly price would render season-ticket property rights worthless, a profit-maximizing strategy requires apparent underpricing.
Ticket scalping is the practice of buying tickets at one price and reselling them at a higher one. The practice is controversial and currently almost half the states regulate the resale of tickets to one degree or another. As with other laws that regulate economic activity, the question immediately arises: ‘Who benefits from the law?’ Economists typically view transactions between willing buyers and willing sellers, such as ticket scalping, as welfare improving. They also view any interference with free market transactions as suspect and as possible evidence of rent harvesting. In an attempt to quantify the economic impact of anti-ticket scalping laws this paper presents a regression model of ticket price determination for National Football League teams and uses it to test the proposition ‘Do anti-ticket scalping laws make a difference?’
This paper develops a model that jointly explains excess demand for performance events and the presence of anti-scalping laws. The explanation is based on the fact that the buyers of tickets are also an important input into the performance experience. The use of line-ups as a screening mechanism (leading to apparent under-pricing of tickets) can be profit maximizing if the input quality of a given buyer and her willingness to pay for tickets are not sufficiently positively correlated. Such a mechanism is not possible, however, if the resale of tickets above the posted price is permitted. Since resale amounts to input substitution, banning such resale is therefore efficiency enhancing.
Changes in technologies for reproducing and redistributing digital goods (e.g., music, movies, software, books) have dramatically affected profitability of these goods, and raised concerns for future development of socially valuable digital products. However, broader illegitimate distribution of digital goods may have offsetting demand implications for legitimate sales of complementary non-digital products. We examine the negative impact of file-sharing on recorded music sales and offsetting implications for live concert performances. We find that file-sharing reduces album sales but increases live performance revenues for small artists, perhaps through increased awareness. The impact on live performance revenues for large, well-known artists is negligible.
Given y=zβ+f(x)+ε where dim(x)≤3, we propose an elementary and asymptotically efficient estimator of β. Data are reordered so that the x's are “close”, then higher order differencing is applied to remove f(x). A simple specification test of f is included.
This chapter considers economic issues and trends in the rock and roll industry, broadly defined. The analysis focuses on concert revenues, the main source of performers' income. Issues considered include: price measurement; concert price acceleration in the 1990s; the increased concentration of revenue among performers; reasons for the secondary ticket market; methods for ranking performers; copyright protection; and technological change.
We test whether textbook consumers are forward-looking, using a large new data set on textbooks sold in college bookstores
during the ten semesters from 1997 to 2001. The data strongly support the hypothesis that students are forward-looking with
low short-run discount rates and that they behave as if they have rational expectations of publishers' revision behavior.
Data from a second new data set on the market prices of used books at Amazon Marketplace also support the hypothesis of rational,
forward-looking behavior. Simulation results indicate that students are sufficiently forward-looking that publishers cannot
consistently raise revenue by accelerating current revision cycles.
This paper proposes a technique for obtaining more precise estimates of demand and supply curves when one is constrained to market-level data. The technique allows one to augment market share data with information relating consumer demographics to the characteristics of the products they purchase. This extra information plays the same role as consumer-level data, allowing estimated substitution patterns and (thus) welfare to directly reflect demographic-driven differences in tastes for observed characteristics. I apply the technique to the automobile market, estimating the economic effects of the introduction of the minivan. I show that models estimated without micro data yield much larger welfare numbers than the model using them, primarily because the micro data appear to free the model from a heavy dependence on the idiosyncratic logit "taste" error. I complete the welfare picture by measuring the extent of first-mover advantage and profit cannibalization both initially by the innovator and later by the imitators. My results support a story in which large improvements in consumers' standard of living arise from competition as firms cannibalize each other's profits by seeking new goods that give them some temporary market power.
Price discrimination among ticket service classes is analyzed when aggregate demand is known and individual preferences are private information. Serving customers in cheap second-class seats limits the seller's ability to extract surplus from expensive first-class seats because some switch to the lower class. Discrimination is greatest in the class with the largest variance in demand prices. The seller's incentives to limit substitution by altering the between-class quality spread and the pricing of complementary (concession) goods are also analyzed. These issues depend on comparing "marginal" with "average" customers parallel to the provision of public goods. Finally, when capacity limitations require sequential servicing of buyers in "batches" (for example, theatrical productions), intertemporal price discrimination requires prices to decline over time, so customers with the greatest demand prices buy higher-priced tickets to earlier performances rather than wait for later performances. The rational policy can generate queues for early performances. Copyright 1997 by the University of Chicago.
A common thread in the theory literature on price discrimination has been the ambiguous welfare effects for consumers and the rise in profit for firms, relative to uniform pricing. In this study I resolve the ambiguity for consumers and quantify the benefit for a firm. I describe a model of price discrimination that includes both second-degree and third-degree price discrimination. Using data from a Broadway play, I estimate the structural model and conduct various experiments to investigate the implications of alternative pricing policies. The observed price discrimination may improve the firm's profit by approximately 5%, relative to uniform pricing, while the difference for aggregate consumer welfare is negligible. Also, I show that the gain from changing prices in the face of fluctuating demand is small under the observed price discrimination.
This paper analyzes the dynamics of prices in two online secondary markets for Major League Baseball tickets. Controlling for ticket quality, prices tend to decline significantly as a game approaches. The paper describes and tests alternative theoretical explanations for why this happens in equilibrium, considering the problems of both buyers and sellers. It shows that sellers cut prices (either fixed prices or reserve prices in auctions) because of declining opportunity costs of holding onto tickets as their future selling opportunities disappear. Even though prices can be expected to fall, the majority of observed early purchases can be rationalized by plausible ticket valuations and return to market costs given product differentiation and uncertainties about ticket availability.
Incomplete product availability arising from stock-out events and capacity constraints is a common and important feature of many markets. Periods of unavailability censor the observed sales for the affected product, and potentially increase observed sales of available substitutes. As a result, failing to adjust for incomplete product availability can lead to biased demand estimates. Common applications of these demand estimates, such as computing welfare effects from mergers or new products, are therefore unreliable in such settings. These issues are likely to arise in many industries, from retail to sporting events to airlines. In this paper, we study a new dataset from a wireless inventory management systems, which was installed on a set of 54 vending machines in order to track product availability at high frequency (roughly every four hours). These data allow us to account for product availability when estimating demand, and introduces a valuable source of variation for identifying substitution patterns. We also develop a simple procedure that allows for changes in product availability even when we only observe inventory (and thus availability) periodically. We find significant differences in the parameter estimates in demand, and as a result, the corrected model predicts significantly larger impacts of stock-outs on profitability.
In principle, a multiproduct firm can set separate prices for all possible bundled combinations of its products (i.e., "mixed bundling"). However, this is impractical for firms with more than a few products, because the number of prices increases exponentially with the number of products. In this study we show that simple pricing strategies are often nearly optimal -- i.e., with surprisingly few prices a firm can obtain 99% of the profit that would be earned by mixed bundling. Specifically, we show that bundle-size pricing -- setting prices that depend only on the size of bundle purchased -- tends to be more profitable than offering the individual products priced separately, and tends to closely approximate the profits from mixed bundling. These findings are based on an array of numerical experiments covering a broad range of demand and cost scenarios, as well as an empirical analysis of the pricing problem for an 8-product firm (a theater company).
We present a framework and empirical estimates that quantify the economic impact of increased product variety made available through electronic markets. While efficiency gains from increased competition significantly enhance consumer surplus, for instance, by leading to lower average selling prices, our present research shows that increased product variety made available through electronic markets can be a significantly larger source of consumer surplus gains.
One reason for increased product variety on the Internet is the ability of online retailers to catalog, recommend, and provide a large number of products for sale. For example, the number of book titles available at Amazon.com is more than 23 times larger than the number of books on the shelves of a typical Barnes & Noble superstore, and 57 times greater than the number of books stocked in a typical large independent bookstore.
Our analysis indicates that the increased product variety of online bookstores enhanced consumer welfare by 1.03 billion in the year 2000, which is between 7 and 10 times as large as the consumer welfare gain from increased competition and lower prices in this market. There may also be large welfare gains in other SKU-intensive consumer goods such as music, movies, consumer electronics, and computer software and hardware.
This paper provides a pure economic rationale for chronic excess demand for tickets to events like rock concerts. The model focuses on 'mob goods,' which are consumed jointly with crowd reaction, or 'noise.' Whereas the primary commodity is provided by the seller, the joint product is provided collectively by buyers. If propensities to make noise are inversely correlated with reservation prices and a capacity constraint applies, excess demand (queuing) is a necessary condition for profit maximization. One important implication is that antiscalping laws may be welfare-increasing. The paper explores other applications in professional sports, restaurants, and on-stage theatre. Copyright 1996 by Kluwer Academic Publishers
This paper specifies and estimates a dynamic model of consumer preferences for new durable goods with persistent heterogeneous consumer tastes, rational expectations about future products and repeat purchases over time. Most new consumer durable goods, particularly consumer electronics, are characterized by relatively high initial prices followed by rapid declines in prices and improvements in quality. The evolving nature of product attributes suggests the importance of modeling dynamics in estimating consumer preferences. We estimate the model on the digital camcorder industry using a panel data set on prices, sales and characteristics. We find that dynamics are a very important determinant of consumer preferences and that estimated coefficients are more plausible than with traditional static models. We use the estimates to investigate the value of new consumer goods and intertemporal elasticities of demand.
This paper presents a model of auctions with resale which is then applied to sales of timber harvesting contracts held by the U.S. Forest Service. After a contract is sold, there is often a considerable delay before harvesting must begin, and each firm's uncertainty regarding the value it places on the contract may be resolved in the interim. Because contracts can be transferred in some circumstances and can always be subcontracted, bidding may reflect the presence of a resale market in which the ex post gains to trade can be exploited. An analysis of the data yields results which support the predictions of the model.
A general central limit theorem is proved for estimators defined by minimization of the length of a vector-valued, random criterion function. No smoothness assumptions are imposed on the criterion function in order that the results might apply to a broad class of simulation estimators. Complete analyses of two simulation estimators, one introduced by A. Pakes (1986) and the other by D. McFadden (1989), illustrate the application of the general theorems. These examples illustrate how simulation can be used to circumvent two computational problems that arise frequently in applied econometrics: evaluating intractable aggregation formulae and evaluating discrete response probabilities. Copyright 1989 by The Econometric Society.
This paper examines direct broadcast satellites (DBS) as a competitor to cable. We first estimate a structural consumer level demand system for satellite, basic cable, premium cable and local antenna using micro data on almost 30 , 000 households in 317 markets, including extensive controls for unobserved product quality and allowing the distribution of unobserved tastes to follow a fully flexible multivariate normal distribution. The estimated elasticity of expanded basic is about -1 . 5 , with the demand for premium cable and DBS more elastic. The results identify strong correlations in the taste for different products not captured in conventional logit models. Estimates of the supply response of cable suggest that without DBS entry cable prices would be about 15 percent higher and cable quality would fall. We find a welfare gain of between 190 per year (aggregate 50 (aggregate $3 billion) for cable subscribers. Copyright The Econometric Society 2004.
This paper proposes a simple modification of a conventional generalized method of moments estimator for a discrete response model, replacing response probabilities that require numerical integration with estimators obtained by Monte Carlo simulation. This method of simulated moments does not require precise estimates of these probabilities, as the law of large numbers operating across observations controls simulation error, and, hence, can use simulations of practical size. The method is useful for models such as high-dimensional multinomial probit, where computation has previously restricted applications. Statistical properties are established using empirical process methods that can handle discontinuities introduced by simulation. Copyright 1989 by The Econometric Society.
A common belief among economists is that the activity of touts (scalpers) is unambiguously beneficial to the market. This note shows that that intuition is in general incorrect. Touts' presence in the market dilutes any individual's chance of obtaining a ticket in the original distribution. It is shown that if transactions costs cannot be pushed high enough to eliminate the resale market, the best policy is to leave touts alone. However, when possible, killing the resale market unambiguously benefits many ticket buyers, including some of the touts and their clients. Copyright 1993 by Scottish Economic Society.
This paper examines competition among middlemen when sellers and buyers can trade directly. Direct trade alters the supply and demand facing the middlemen, making them interdependent, and reduces the market power of intermediaries. However, it does not alter the result of Dale O. Stahl (1988) that middlemen may have an incentive to 'corner' the market if demand is inelastic. The model is applied to market making in financial markets, vertical integration in goods markets, and to the question of bypass in utilities. This discussion suggests that cornering is most likely in markets for essential inputs and that it may enable seller collusion. Copyright 1997 by Blackwell Publishing Ltd
If a monopoly supplies a perishable good, such as tickets to a performance, and is unable to price discriminate within a period, the monopoly may benefit from the potential entry of resellers. If the monopoly attempts to intertemporally price discriminate, the equilibrium in the game among buyers is indeterminate when the resellers are not allowed to enter, and the monopoly's problem is not well defined. An arbitrarily small amount of heterogeneity of information among the buyers leads to a unique equilibrium. We show how the potential entry of resellers alters this equilibrium.
The moment a performance begins, that seat is dead … . It's like fruit. It's perishable.
— Jeffrey Seller, producer of Rent. New York Times, July 20, 2003.
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