Thursday, August 2, 2007

Everyday Economics: Ticket Scalping

Here in Washington DC, the 9:30 Club has been providing musical entertainment for decades. At their current location, on the corner of Florida Avenue and V Street Northwest, they have established themselves as the premier live music club in the city. Bands from all genres stop by, and most nights are booked throughout the year, sometimes doubly, with an early and a late show.

Being a major market, venues in Washington DC tend to be booked by nearly every established touring band at one point or another. While large venues such as the downtown Verizon Center, and the suburban Patriot Center in Fairfax, Nissan Pavilion in Stoneridge and Meriwether Post Pavilion in Columbia take the larger acts, the 930 Club takes on the endless up and coming, medium to not-quite-huge and established independent acts.

In the past, many shows have sold out before the day of the show, which lead to an increasing market for scalpers. Despite efforts to stop this practice through various regulations and citing city laws, scalpers always find a way to meet the demand for the product they offer.
However, recently the 9:30 Club has been experiencing fewer shows selling out before the day or day before the show date. Is the quality of acts appearing or the demand for shows at the club shrinking? Or has the club finally figured out how the market works, and adjusted their prices accordingly? According to many who complain about the higher ticket prices, it seems to be the latter.

As I write, bands currently listed on their website as having upcoming shows include popular local metal act Darkest Hour; the wildly popular mainstream rock band Stone Sour, off-shoots of the even more wildly popular Slipknot; alternative country crooner Neko Case; ska-punkers Less Than Jake; up and coming indie act The National, on a two-night stand; and the pop group known as Hanson. All of these bands have sold out shows at the club in the past, some well in advance. However, currently, only Neko Case is sold out.

Every now and then, the club gets a surprise booking by a large, arena-sized act looking to do a special show, as seen recently by shows featuring the Smashing Pumpkins, Incubus, Good Charlotte and The Beastie Boys.

Being such a popular venue in a large market, shows have often sold out. At times, it was not uncommon to scroll down the list of upcoming events and see many listed as being sold out, some well in advance. And of course, with this, comes the dreaded ticket scalper.

In the past, when tickets sold out, scalpers and the ticket less alike would head to the venue on the night of the show looking to make instantaneous trades. It was not uncommon to see multiple ticket less patrons bidding to one single scalper on the spot, until one by one they dropped out, realizing that they didn’t value the ticket as high as it was going.

Then came the internet, and the advent of websites like eBay, Craig’s List and Stub Hub; scalpers now had more venues on which they could peddle their wares and could ensure tickets were sold before going to the venue on the night of the show, and just the same, those without tickets could now try to confirm the purchase of a ticket before trekking down to the venue to risk losing out in a street-bid. The underground scalping business blew up.

All along, there have been people decrying scalpers as evil human beings, taking advantage of true fans to make a quick buck. Regulations and laws were passed, but still, the business lived on, because no matter how many laws were passed, there were still patrons who missed out on tickets that were willing to pay. As sales on the internet grew, scalping became harder and harder to stop.

Here is where the first economics lesson comes into play.

Supply and Demand

The 930 Club has a capacity to accommodate 1200 people. For the sake of simplifying things, we’ll eliminate variables such as the number of staff, artists, crew and guest-lists, and assume that 1200 tickets are available for sale for each show.

The club and its promoters set the price for each show based on a number of factors:

  • The general operating costs of opening the club on the night of the show
  • The costs of paying the performing artists
  • The general demand of the public regarding tickets to the show
The general operating costs include paying the staff to work on the night of the show, the overhead costs such as utilities, building rental/mortgage and taxes. These costs are generally fixed, with utilities varying depending on usage and the time of year, as with any building.

The second two, costs of paying the artists and the demand of the public are where we get into our economics lesson. Artists generally negotiate a fee with the venue ahead of time, based upon their perceived value. Artists that are valued high are ones that can sell a lot of tickets, whereas bands that are valued low tend to be the ones who won’t, or are at least perceived to not be able to sell a lot of tickets.

Given this, the artists and clubs will agree on terms of payment, which generally include a “guarantee,” an amount that the bands will be paid just for showing up and performing, and a percentage of the ticket sales. The more valuable the artist, the higher the guarantee. Less valuable artists generally settle on a lower guarantee, and try to make up the difference through their percentage of ticket sales.

This is where we see the first of our two points on the economics of supply and demand in action: if an artist feels that most if not all of the 1200 tickets with his name will sell, then naturally, he will ask for the most money possible that he feels he can get. This is his perceived value.

Because there is a high demand for the tickets and a limited supply are available (1200), the fee he charges for his appearance and performance will be higher. He is supplying a service to not only the fans that benefit (hopefully) from the entertainment of the performance, but to the venue as well, who promote and sell the tickets, and stand to benefit.

At the same time, the club tacks on extra to the ticket prices to help pay for their service, which is providing the venue and promotion of the show. This is where the final face-value of the ticket is set. After the club has determined the guarantee and the percentage of ticket sales that will be set aside to pay the artists, they then must determine how much it will spend operating the club that night, and how much they need to make in profit to make the club even worth maintaining.

They must also factor in how much they think fans are willing to pay. Of course, some of the costs are offset by sales of alcohol, food and merchandise within the club. But ticket prices need to be set to make up a majority of the costs of putting on a show.

This is where the second part of our lesson in supply and demand comes into play. Given that the club would like to maximize its profits in order to make the enterprise worth maintaining, naturally, higher ticket prices are preferable, especially the more the price of the tickets exceeds the costs of paying the artists and operating the club. However, they can’t charge higher prices than the fans will pay, so they have to do a bit of guesswork, roughly calculating the proper amount.

A few factors that come into play are keeping up good relations with the artists and the fans. If prices are extraordinarily higher than the guarantee paid to the band, the band might be upset and feel cheated. At the same time, if prices are significantly higher than fans feel comfortable paying, they’ll complain, or just sit at home and not pay at all.
In addition, if prices are set too low, tickets will sell out quickly. This is a basic fact of economics; if prices are set too low compared to their demand, there will be shortages. More on this in the next section.

The trick for the venue (or any business involved in the sales of goods and services) is setting the prices just high enough that they’ll sell as many as possible while also making the highest possible profit.

The Economics of Ticket Scalping

Sometimes, an artist or venue will be undervalued. The main factor that can lead to this is when an artist suddenly becomes more in demand after the terms of the performance and ticket prices have been negotiated. Other times, artists and venues simply misjudge their own value, and occasionally, the terms are undervalued on purpose, either for promotional purposes or because the “integrity” of a certain artist demands lower ticket prices for his fans.

Unfortunately, when undervaluing occurs, the marketplace is not very forgiving. Even the best of intentions, such as in promotional or integrity-based undervaluing, can turn out ugly when the demand is far greater than the supply, and ticket prices are not valued accordingly.

Say a high demand artist that is generally valued high enough to play in large venues such as arenas that hold over 10,000 people, wants to do a special show at the club. Maybe they want to take a nostalgic trip back to their roots, and play in a more intimate venue so they can better connect with the fans. The artist even decides to waive his normal high guarantee for a much lower one so tickets can be priced lower, and in addition, they include in terms of their contract that ticket prices must be controlled.

The show is announced, and tickets will go on sale the following weekend for $35 a pair, which is the same price distant upper level seats at any given arena show for the artist. The day of the sale comes, and all 10,000 people who love to see the artist in a non-intimate arena are incredibly excited about a chance to see them up close in a club. So, at 11:00am on Saturday, more than 10,000 attempt to buy 1,200 tickets at the exact same time. Naturally, within five minutes or less, the tickets are sold out. 1,200 people are happy, but over 8,800 are upset.

Granted, most of these upset patrons who were shut out will just give up and wait for the next arena show, when tickets will be a little easier to obtain; but a good number of them will still want to try other methods of obtaining tickets, the easiest of which will be through scalpers.
Even smaller acts can have a larger demand, especially when the act is probably not big enough to play in one of the 10,000+ seat arenas, but also probably too popular to accommodate their demand in a 1,200 person club. In a city like Washington, this type of act can be hard to accommodate, and thus naturally, a band would rather play a full club rather than a half-full arena.

So, tickets for the show sold out within five minutes, leaving many people who had demands for them out in the cold. How best to fix a problem like this, and get the artists and the club the most money possible (i.e. the money that the scalpers were making on the black market)? Equalize ticket prices.

Sure, some fans complain when ticket prices are higher; however, they’re also the same ones complaining louder when the tickets sell out within five minutes and they are shut out. So, when a show that costs $25 sells out within five minutes, the next time the act comes to town, the prices are raised. This way, the fans who value the experience the most will buy tickets, and those who maybe didn’t feel as strongly, but only demanded tickets because it was trendy or because their friends were going will decide it isn’t worth it for them. And most of all, scalpers will see that the face value is the same as the price they were getting last time on the street, and will also sit out.

It is argued that this discriminates against fans who don’t have the money to go; but it can also be argued that if they were true fans they would make the sacrifice to pay the extra money up front to ensure themselves a spot inside the club, rather than risk a madhouse to get cheaper tickets, where they have a much larger chance of missing out, and paying the higher price to a scalper later anyway.

It comes down to this: scalpers provide a service that is in demand only when the clubs and artists undervalue their service. If the club and artist valued their service properly, scalpers would vanish. As was mentioned in the beginning of this article, only Neko Case was sold out at the time of writing; this particular show was set at $20 a ticket, and sold out within three days. Scalpers, who can foresee this happening based on previous experiences (she sold out the last two shows at the club in advance), are inevitable. Perhaps if the club, who has the same foresight as scalpers, had priced the show closer to its market value, say $35 or $40, it wouldn’t have sold out until the day of the show. This way, they could have maximized the profit for the artist and the club and kept it out of the hands of a black market scalper.

Is it the scalper’s fault that the artist and club failed to value their product properly? No; but it does leads there being a market for his service. It is no more the scalpers fault that there is a demand for after-market tickets, than it is the fault of the poor cocoa farmer in Columbia that there is a drug problem in the United States. If the demand is there, a market will appear; if there isn’t a demand, there will be no market. All of the attempts to kill the supply through regulations and laws won’t stop something that is demanded. That’s how markets work, in everything, from tickets, to drugs and to basics such as food products and clothing.

By raising prices to accommodate for proper market value, artists, venues and true fans win, and scalpers lose.

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