On Scalping

Scalping tickets. It seems shady! I started thinking about scalping recently, when a friend of mine told me he had bought dozens of tickets to Hamilton, and had been reselling them online for many multiples of the purchase price. This revelation irritated me. Most of the people I've talked to view scalpers' existence with a mixture of resignation and disgust (basically, "Ugh, fine.") because scalpers drive prices up, making events unaffordable for many fans.

The literature in economics has a much more indulgent view of scalpers, pointing to the fact that scalpers clear the market, letting people who are willing to pay more for the good do so. It seems that the economics literature fails the smell test on this issue, so I wanted to spend this inaugural post trying to understand whether I have the right to heap judgement on my friend. My prior is that I do - at least one scalper heaped judgment on himself.

WHY DOES SCALPING EXIST?

Hamilton's a popular show, and a lot of people want tickets. Ticket prices are low enough that more people want tickets than can have them.

Very basic economic theory says if people are willing to spend to acquire something, they should be allowed to, and a market where people could trade tickets would allow the price to move up until the amount of people willing to buy exactly equaled the supply of available tickets. Scalpers provide this market.

But this market only exists because prices are so low in the first place. The apparent mispricing of these tickets enables scalpers. So why are prices so low? Hamilton producers must know they could increase prices and still sell out. A few potential reasons are:

1. Uncertainty

The producers may have been uncertain about what demand was going to be when the price was set. Perhaps Hamilton got lukewarm reviews at first, and then its subsequent popularity was surprising. (Not likely.)

2. Altruism/Egalitarianism

The producers may want to avoid pricing anybody out. There could be an altruistic, egalitarian spirit behind this - that art is for the fans. It could also be a smart business decision (no reason the two can't coexist!). Fostering some goodwill by not charging exorbitant prices encourages more "diehard" fans to attend a show, which could improve the show's atmosphere. Further, getting people in the door could make it easier to make money on merchandise.

3. Long-term Profit

Long-term profit maximization. Hamilton plans on being around for a while, so pricing to maximize decades-long profits could make prices lower today than if the producers wanted to make the most money off of its current intense popularity.

WHY IS SCALPING CONSIDERED OBJECTIONABLE?

1. Arbitrage

One reason is common to a universal distaste towards arbitrageurs: they make money off of a product they had no part in creating. My friend can make ~$1000 a ticket for Hamilton by scalping, which is a whole hell of a lot more than anyone else (even Lin Manuel Miranda, himself) is making per ticket.

2. Taking Consumer Surplus

Another is that scalpers by their nature try to drive prices up by limiting supply so they can make more money, thus restricting access to a popular event. Instead of letting a consumer enjoy the surplus of getting a ticket for less than he would be willing to pay for it, scalpers take every last dollar from the consumer, appropriating that surplus for themselves.

3. Fighting the Producer

But the biggest reason in my book is the harm done to the producer. Event producers systematically underprice their product. If this underpricing is intentional, then scalping undermines the producers. Consumers have no "right" to the surplus mentioned above unless the producer wants them to have it. But most anti-scalping lawsuits and efforts towards regulation are brought by producers, as opposed to consumer advocacy groups. This lends credence to the idea that producers want to pass on the surplus to the consumer, as opposed to the scalper.

WHAT ARE TRADITIONAL ARGUMENTS IN FAVOR OF SCALPING?

1. Gets some revenue back to the Producers.

Oftentimes, ticket reselling sites like TicketMaster will send a small percentage of the profit made to the producers. This argument is not very convincing because producers could capture that themselves by raising ticket prices by a little.

2. People may want to resell for a variety of reasons - and scalping facilitates that.

This is an unmistakable positive about a strong secondary market for tickets, and thankfully is not specific to scalpers. People will from time to time find themselves unable to attend a show, or their preferences might change. Having a place to offload tickets is definitely valuable. But you don't need scalpers for that.

3. Biggest point: It Clears the Market.

The biggest and most common argument in favor of scalping is that it clears the markets. People who didn't get a chance to pick up tickets, but have the means and the desire to pay extra for them can still find a way to make it to the show. Clearing a market is a standard measure of efficiency in economics. Consider the following three individuals:

Under a scalping system, tickets would be allotted first to B and C, and then to A. However, it could be argued that B values the event most as she would spend 40% of her wealth to attend; A values it next highly at 20% and C the least at 4%. We could call this a "merit" system. Both systems value B over A, but the second values both over C, while the first treats C on par with B. The scalping system is the economically favored one, as it allocates the tickets to those who value it most, in dollar terms.

ADDITIONAL SUBTLETIES

Just because the scalping system is economically favored, does not necessarily make it optimal, however. This is where other considerations come into play:

1. Uncertain Valuation

Unlike many goods that are traded in financial markets, events are typically consumed only once. Therefore, deciding how much to pay for them is not easy. The valuations above may be how much A, B, and C are willing to pay for a ticket, but maybe not how much they would be willing to sell one for once owned, or how they would value the event itself. Such behavioral tendencies make it difficult to determine just how valuable market clearing is. Maybe A would get $800 worth of enjoyment out of Hamilton were he given the chance to attend, but he doesn't know that when he sets his price of $200.

2. What is the purpose of a ticket?

Is there an ethical issue with using tickets to artistic events as methods for wealth transfer? A ticket is not a financial security - and one could think of a ticket, instead of a thing to trade and make money, as a gift to the fans. An artist is offering a product (the show) to a fan, at something less than the fan would be willing to pay. Assuming the under-pricing is intentional, that difference in value is a "gift" of a sort from the artist to the fan. What scalpers do is measure that difference in dollars, and take it. If producers want to give surplus to the fan, that changes the concept of a ticket from a stock which can be used as an exchange of value, to something different.

3. Artificial Shortages

One important Con that I haven't brought up until now is how scalpers get their tickets in the first place. By buying first and in bulk (like my friend). Consider the following example to illustrate why this is so terrible: Suppose there are 100 tickets Hamilton each priced at $100. And suppose that only 100 people in the world want to see Hamilton, and they all value seeing it at $200. If the first person in line buys all 100 tickets, he can then sell those tickets to the other 99 customers for $200 apiece. This serves no benefit to anyone but himself, and makes everyone else strictly worse off. Creating artificial shortages by buying up supply to then mark-up prices is an unquestionably negative effect of scalping, and is unique to scalpers as opposed to generalized secondary markets.

WHAT ARE SOME POSSIBLE REGULATIONS AND ALTERNATIVES?

1. Price Caps

Some states have proposed capping the price at which tickets can be sold. For example, if a ticket's face value is $100, a price cap could be $200.

Pro: This limits the degree to which a scalper can take the consumers' surplus, and it reduces, but doesn't eliminate the producers' desire to have lower prices.

Con: In the example above with players A, B, and C, if resale is capped at $200, and A bought a ticket, he would have no incentive to resell it. But both systems above ranked B over A in "scalping" and "merit". A would want to sell to B or C in an uncapped market. Further, selling to B would be an improvement for both parties.

2. Quantity Caps

Another regulation would allow each customer to buy only a limited number of tickets.

Pro: This would eliminate the artificial shortage problem created by most scalpers. Also it would generally disincentivize scalping due to the limited profits available. It would still allow resale, which would enable B to make A an offer and have a shot at a ticket.

Con: This is very difficult to enforce for non one-off shows. Scalpers could spread out their purchases over dozens, or hundreds of shows of Hamilton, for example. Also scalpers could use bots to buy up large fractions of the tickets; this happens frequently in practice.

3. Segmented Markets

Creating a multi-tiered system is another alternative. Hamilton does have Premium Tickets available for the best seats, for example. What if: (i) a fraction of tickets were "Named" as in, if you buy the ticket, you must attend (could be done with ID verification at the gate) (ii) another fraction are sold at an auction (similar ideas have already been proposed). The house auctions off this latter fraction to the highest bidder with the auction closing shortly before the start of the show.

Pro: Eliminates scalpers completely. Allows producers to maintain egalitarian pricing for one fraction of the audience. Simultaneously allows producers to capture the upside of the popularity by making the secondary market beneficial only to the producers. The producers could vary the fractions over time as well. As the show's popularity diminishes, more tickets would become non-refundable.

Con: "Named" ticketing is currently illegal in New York - the only state that outlaws it. The State Attorney General is calling for the legislature to rewrite the ticketing laws. Not to make "named" ticketing mandatory, but to give artists that option.

SHOULD YOU SCALP?

Buying in bulk to scalp is unquestionably problematic as it distorts markets by creating artificial shortages (as mentioned above). Don't scalp in bulk.

At a smaller scale, this decision will depend on why you think tickets are underpriced in the first place. If you think producers are just making a mistake by pricing low, and you don't buy the altruistic motive, you probably feel scalping is justified. If, on the other hand, producers have a long and established track record of fighting scalping and preaching the egalitarian story, maybe don't try to make your extra money this way. Some artists have found particularly satisfying ways to enforce their wishes. All of these stories make me believe that you shouldn't scalp. Especially not Hamilton.

UPDATE (5/14/16): Hamilton has instituted quantity limits on their ticket purchases.