Monday, May 01, 2006

I Don't Get It -- World Cup Tickets Edition

This week in class, we will discuss how social forces can tweak the market for goods. We'll discuss why hot restaurants and clubs have long waiting lists or lines, why fashion designers need to produce radically new lines every few months, why you can buy ridiculously high quality items (even though almost no one can actually notice the quality difference), and some other market oddities that a driven by social pressures.

To start, in this post, I consider ticket prices. From a very basic economics perspective, tickets to popular events like rock concerts are underpriced. Long lines and robust secondary markets suggest that there is massive excess demand for these tickets. Any ec10 student would be able to tell you that suppliers should raise their price until the market clears and earn more profits. Why don't they do this?

Economists typically rely on two explanations to explain this phenomenon. The first, which I will post more details on later, suggests that lines serve a marketing function (perhaps even starting an information cascade which substantially increases demand for the product). The second, popularized by Steven Landsburg, argues that suppliers' (e.g., the rock bands, their labels, and promoters) maximization problem includes not only ticket sales, but also sales of other merchandise. Landsburg argues that people who can only afford cheap tickets may be more likely to buy all the other crap and, in the end, generate similar or greater profits for producers. Thus suppliers keep ticket prices low in order to draw in these customers. (This would help explain why promoters might lobby to make ticket scalping illegal.)

These explanations certainly have some validity and can explain some ticket pricing puzzles, but I still don't really get it. Take this summer's World Cup in Germany. Tickets were allocated almost entirely by lottery, and FIFA has essentially shut off the secondary market by printing your name on your ticket and requiring passports to enter the stadium. I would guess that the welfare loss from this system is staggering. To get a rough sense of the loss, imagine how much more revenue would be raised if, instead of the above system, those with initial ticket rights had auctioned all 3.07 Million match tickets on eBay. I cannot imagine that the marginal change in merchandise sales or long term support for soccer makes up for difference in ticket revenue. Certainly, there are fairness and security issues that I might be sympathetic to, but I cannot imagine that there is not an alternative system which does not generate such enormous losses to total welfare.

So, like I said, I don't get it.


Do you know if tickets were priced the same for everyone? I wonder if US fans paid the same price as fans of less developed countries to get into the games. My understanding is that they did.

Certainly the income/wealth distribution of soccer fans is much wider than that of Pearl Jam fans, so the fairness issue might be bigger here. Of course, that still leaves open the question of how fans of LDC teams can afford even the "low" uniform price and/or get to Germany.

And, of course, I guess that a lucky lottery winner from a LDC could make a year or more's salary by unloading his tickets on the secondary market.
Actually, let me add something to this. The income/wealth difference might be what's really important here. We are measuring surplus losses here in terms of $, which is our standard way of doing it. However, I'd posit that for something like this, total welfare losses aren't as large as you'd get by taking the area below the demand curve. There's going to be a huge endowment effect for anyone who got the tickets. The bigger the differences in the marginal value of a $ across the population, the worse $-denominated measures of social welfare will be.

Surely there's some (large) loss here, but I doubt it's as big as your (my) initial instinct says it is.
I am with you that endowment effects likely offset some of the loss. I think the thing that I have the biggest problem with is shutting down the secondary market with the whole passport thing.

Low prices and lotteries, for at least some tickets, seems fair and unlikely to impose insanely large welfare losses. But why not allow the market to clear at least a little bit ex post? At this point, FIFA or whoever could even collect some of the rents in this market by charging a fee (or something) to change the name on the ticket.
I'm on board with the secondary market issue. The only argument for something like that is some sort of paternalistic motive. Like people don't properly realize how valuable going to a World Cup game is to them, and would be irrationally swayed by a $1500 offer for their tickets. But that seems a more than a little absurd.
In reality, I think the secondary market issue probably has more to do with keeping out the hooligans then any paternalistic motives.

So I guess we can blame this all on the English. The negative externalities from hooligans.
well, that's still paternalistic, but more literally, like parents punishing their hooligan children by not letting them attend the game.

And actually, that might make sense, because over-the-top fan activity at soccer matches has been known to lead to death, and the cost of an incident like that is arguably/likely high enough to justify the cost of the policies in place.
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