Is the Price Right?

By: Ines Ajimi

Concert Ticket Pricing in Primary and Secondary Markets

Living in New York City brings about a wealth of exciting entertainment opportunities – if you can get tickets to any of them, that is. From Adele to Hamilton, ticket scalpers have repeatedly made the news by buying up an inordinate amount of concert tickets for the sole purpose of reselling them at egregious prices, making a killing off of devoted fans.

Though thoroughly unpleasant for most of us, ticket scalping is a topic ripe for economic analysis: why are such opportunities available in the secondary market? How common is price gouging? How are resale tickets priced? And what does this imply for the welfare of artists, ticket scalpers, and fellow concert-goers?

(1) How are concert tickets priced?

Concert tickets have three key characteristics: first, they have no value past the concert date; secondly, their “quality is only known after it is consumed” (Connolly & Krueger 2006); and thirdly, their prices are set by an agreement between artists and promoters. Together, these features turn concert ticket pricing into a complex coordination game between sellers and buyers.

Concerts are highly differentiated products from the point of consumers: despite both artists being from the same genre, you wouldn’t necessarily give Macklemore tickets to a Kendrick Lamar fan. Therefore, artists theoretically have a measure of monopoly power over the concert market which they could use to extract rent from their fans.

However, they face several constraints when selling their tickets. Some are physical: the number of tickets which can be sold is restricted by venue capacity and the quantity of concerts an artist can give is limited by their touring schedule. Another is legal: the aforementioned contract between promoters and them fixes prices definitely, leaving little-to-no room to adjust prices to market demand. But the most important constraint is a by-product of imperfect information: demand uncertainty.

Prior to going on tour, artists have only a limited knowledge of the demand for their concerts. Their best guess is based on previous sales numbers, which can easily become outdated, and although this estimate could be improved by going on tour more frequently, this comes at the risk of decreasing demand for their performances. Consumers also face uncertainty when it comes to their own demand: whether they will still be available on the concert date, whether tickets will still be left in the near future and over the value/quality of the performance.

Artists therefore have one chance to price their tickets, with limited information. Since their likelihood of picking the optimal price is low, they must err either on the side of over- or under-pricing.

The threat of over-pricing is very real: The Economist reported that “40% of [Live Nation Entertainment] seats routinely went unsold” in 2010. Besides resulting in an inventory of unsold tickets, low concert attendance also limits the artist’s ability to profit from complementary sales (concession, merchandising and recorded music sales). Moreover, sparsely attended performances makes for a bad experience for concert-goers and can thus “damage the artist’s eminence and ability to sell tickets in the future”(Courty & Pagliero 2014).

Artists therefore have an incentive to underprice tickets, despite venue capacity and touring constraints.

Yet insufficient information cannot explain why artists like Lana del Rey price their tickets at $59, knowing that they will sell out in only in a few days, sometimes even mere hours, and be resold on the secondary market for upwards of $250.

Economists have tried to explain this a priori irrational systematic under-pricing with insights derived from psychology.

Kahneman, Knetsch & Thaler (1986) argued that consumers have expectations of ‘fairness’, which are especially strong for market relationships with repeated transactions — e.g. artists and fans. Prices which run counter to these expectations can therefore generate backlash, even amongst devotees. As put by stand-up comic R. Eric Thomas in an open letter to Beyoncé: “I didn’t pay $600 for my bed and my ass is in that every damn day. You think I’m going to pay $600 to stand in the middle of a stadium and squint to see you? No ma’am! (I mean, yes ma’am, but really…)”.

Krueger (2004) and Happel & Jennings (2010) built upon this notion of fairness, suggesting that underpricing could be a public-relations gesture which generates “goodwill” amongst the fanbase, encouraging them to get reciprocate either financially or through unpaid ‘promotional’ work. Research by Courty & Pagliero (2014) finds evidence that artists differ in their willingness to exploit their monopoly power, which does suggest that fairness enters into consideration, either due to genuine or strategic altruism.

No matter the reason why, underpricing “suggest[s] that some artists leave surplus to consumers” (Courty & Pagliero 2014). Though intended as a favor to fans, the discrepancy between consumers’ ‘willingness-to-pay’ (the highest price they would purchase the tickets at) and the ticket’s actual price, as well as the inherent constraints on ticket quantities, allows scalpers to swoop in in the hope of turning a profit. In other words, underpricing is a necessary condition for lucrative secondary markets.

(2) How are resale concert tickets priced?

Before answering the question above, we should ask ourselves where do resale tickets come from? Obviously, not all are sold by professional ticket scalpers. In fact, according to Leslie & Sorensen (2014), as much as 46% of resale tickets are from fellow concert-goers. It stands to reason that fans who cannot attend the concert will want to limit their loss by selling their tickets in the secondary market alongside scalpers. We would expect ticket-scalpers and ‘busy’ concert-goers to vary in reselling experience, motivation/patience and, therefore, pricing strategies.

In both cases, their decision, and that of buyers, will be time-dependent, since concert tickets are perishable goods. As the event draws near, the availability of both tickets and concert-goers is revealed, decreasing demand uncertainty. Thus, on the one hand, ticket scalpers discover whether their investment was successful or not (i.e. whether the concert sells-out or not) while, on the other, consumers either decide they want to buy tickets to the concert or find out they will be unable to attend it.

To understand the pricing strategies of resellers in the secondary market, we must distinguish between sold-out and non-sold-out events. There is little opportunity for a profit for the latter, as tickets are still available at face-value. As long as this is the case, resellers’ prices will tend to converge towards the primary market price over time, as the probability of the event eventually selling-out decreases.

By contrast, resellers as a whole have a monopoly on sold-out events and can therefore leverage their market power into extremely high mark-ups. Yet, even if ticket scalpers could collude and act as a united group, competition from ‘busy’ concert-goers, desperate to get rid of their unwanted tickets, can pressure prices down.

Empirical research has found that the majority of secondary market ticket prices do go down over time, suggesting that, overall, resellers ‘discover’ the value of their tickets by over-pricing at first, then gradually decreasing their price until they make a sale. I found evidence of this trend using data scraped from Seatgeek over the past couple of weeks  on concerts held in four New York City venues: the Bowery Ballroom, Brooklyn Steel, the Music Hall of Williamsburg, and Terminal 5.

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Profit margin of tickets over time-to-concert (i.e. distance) listed on Seatgeek for concerts taking place between October 31 and November 7, 2017

Preliminary analysis shows that only 28% of shows listed were sold-out. As shown in the graph above, the price of resale tickets for both sold-out and non-sold-out shows tends to decline over time. Sold-out shows, however, are typically priced on average at 4 times their face-value, against 0.7 times for non-sold out shows. (Note: Seatgeek takes a 20% fee off of sales revenues, so the net profit of resellers is lower). Those are simply general trends: there are significant differences depending on both the artist and the venue, suggesting that there the existence of a strong idiosyncratic component in pricing.

Indeed, the ten artists commanding the highest profit margins (>80%) were Greta Van Fleet, Giraffage, Daniel Caesar, The Dream Syndicate, The Frights, Lana Del Rey, Jeff Rosenstock, Ibeyi, H.E.R., and Liam Gallagher. The fact that only a handful of them are household names suggests that there is a speculative element to ticket scalping.

(3) What does this mean for consumers?

The underpricing in the primary market, though rational from the point of view of the artist, has two unintended and related consequences: it first allows resellers to make profit off of excess demand for sold-out concerts which then gives them an incentive to buy up tickets early. Scalpers therefore increase the competition for tickets in the primary market: as many popular artists’ fans know, trying to buy tickets at the exact moment they are put on sale does not necessarily guarantee success. This artificial inefficiency in the primary market has significant implications for the redistribution of welfare in the secondary market, as only fans with a high willingness-to-pay and high “arrival costs” will be willing to purchase tickets at the scalpers’ price (Leslie & Sorensen 2014).

Though it is tempting to decry ticket scalpers as profiteers, it is important to place their role in a broader context. Scalpers can play a useful role for artists and venues, as their willingness to buy tickets early (in contrast to fans who must discover their demand for the concert over time) guarantees them a baseline level of revenue. Much like speculators in financial markets, scalpers allow organizers to spread their risk. Moreover, secondary market sellers grant concert-goers greater flexibility in planning, by allowing them to buy and sell tickets up to the very last minute.

Love it or hate it, artists’ underpricing in the primary market has made scalpers a fixture of the modern concert industry. For the most in-demand shows, scalpers redistribute welfare between ‘lucky’ fans who are able to (virtually) camp-out on venues’ websites and ‘unlucky’ fans. The substantial welfare premium enjoyed by the former comes at the expense of those amongst the latter who lack the disposal income to afford tickets at the scalpers’ price. Though there is no easy fix in sight, savvy fans will realize either from the above or their own experience that patience is a virtue: prices will go down eventually.

BRIEF NOTE ON THE DATA USED: The data used comes from data-scraping the Seatgeek website and recouping those results with the official information listed on the Bowery Presents’ venue page. The data was collected between October 18, 2017 and November 7, 2017, covering 166 concerts given by 137 different artists. “Distance” measures the distance between the date the price was collected at and the concert date. “Price” is the lowest price listed on Seatgeek for a concert ticket, all quantities included.

NOTE 2: The graphs use profit margins (100*(resale price – original price)/original price) to allow a better comparison between artists. Since (as previously mentioned) Seatgeek takes a 20% fee from sellers, the break-even point for resellers is at 20%.

Works Cited