Home > Economics - General > Markets in everything (not) [Part 2 of a CT debate]

Markets in everything (not) [Part 2 of a CT debate]

June 20th, 2005

In an illustration of the BlogGeist at work, the issue of using lotteries to allocate scarce tickets to public events has come up in the Monday Message Board here and also at Crooked Timber. At first sight, the dispute over Bob Geldof’s attempts to prevent resale of tickets to Live Aid 8, discussed by Henry Farrell at CT, looks like a classic dispute between hardheaded economists and soft social scientists. In reality it’s nothing of the kind. The critics have not only ignored the issues raised by sociology and other disciplines, they have got their economics wrong.

The critics’ analysis starts at the point when the lottery concludes. Ex post, they say, allowing resale of the tickets makes both buyers and sellers better off, and makes no one worse off. For example, Lynne Kiesling says

Yeah, sure, there are people who are too broke to pay more than face (i.e., students, like I was when I attended a LiveAid concert), but they’ve already done the ticket lottery and I’m sure lots of students got tickets and are planning to attend.

and others imply much the same.

But this is woollier economics than anything Geldof has said. The people who are now selling their tickets almost certainly entered the lottery with the intention of resale. Obviously, this reduced the chances of genuine entrants like the students Kiesling refers to.

Moreover, to the extent that genuine entrants anticipate the involvement of scalpers, participation in the lottery will be reduced.

It’s true that, other things equal, and provided no-one has nonmonetary motives, concerns about fairness and so on, the equilibrium number of lottery ticket sales will be higher with scalpers than without. In effect, participation is raised because the scalpers line up in place of buyers who are unwilling to do so. This outweighs the decline in the number of genuine buyers.

But the critics have missed another crucial aspect of the equilibrium outcome. We need to take another step back and look at the supply of the concert itself.

Geldof is relying on donated services from musicians who would otherwise be selling them. To the extent that lottery tickets go to people who could not otherwise afford to pay, the musicians are giving up time, but not money (and getting good publicity). But with resale, the charity concert becomes a substitute for attendance at a standard concert. Musicians might reasonably change their minds about participation.

In summary, even without invoking nonmonetary motives, there’s no reason to suppose that the concert and lottery would raise as much money with resale as without. And the idea of auctioning tickets directly is subject to exactly the same criticism.

Of course, as Henry points out, the idea that motives are exclusively monetary is silly in general, and even sillier in the case of a charity concert. It’s well known that monetary and altruistic motives tend to crowd each other out.

There are very good reasons why monetary and non-monetary motives do not play well together. Once monetary motives are brought into play, there are opportunities for arbitrage, of which scalping is an example. Successful practitioners can turn consistent small profits into large gains at the expense of less sophisticated trading partners.

One version of arbitrage relies on calculation errors (sucker bets and the like). But attempts to manipulate non-monetary motivations of trading partners, including altruism, egoism, desire to avoid conflict and so on, are equally important. Many standard sales tricks fall into this class.

It follows that, in self-defence, people engaged in market dealings must avoid allowing themselves to be manipulated by appeals to non-monetary motives. A standard way of doing this is to adopt a division between monetary and other activities, with separate ethical standards for the two spheres. The idea that ‘business is business’ is one expression of this.

It’s certainly possible to argue with this division. The push for corporate social responsibility is one example of an attempt to bring nonmonetary motives into the business sphere, though not one I imagine Geldof’s critics would endorse. And feminist critics of household economy have made some good points about the operation of self-interest within a sphere that’s conventionally assumed to be governed by altruism.

Nevertheless, business dealings are always going to be different from other social relationships. Attempts to defend the separateness of the two spheres are both legitimate and desirable. Geldof is right and the critics are wrong.

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  1. andreas
    June 20th, 2005 at 21:52 | #1

    JQ: While i agree with most of your comments, i doubt one could perceive live8 concerts as being substitutes to real live concert performances. considering that performance of indivdual musicians is limited to prob around 15-20 minutes and the ridiculous prices that the tickets are going for, consumers solely concerned about the music of one band would be much better off watching the individual band concerts. Apart from London, the musician line up for the events is extremely varied, ie berlin has ‘A-ha’ german punk and country music band lining up together, which would probablydetract fans of individual bands.

    The only exception i can see for this is of course for u2 fans, since this band was said to have launched its career at the original live aid concerts. (Lets not forget that the publicity that smaller bands get from such performances probably counts for them participating even if they were worried about a decline in their own concert revenues). And Bono being Bono, fans are hoping for a once in life time performance that will go down in the annals of rock history. Note ebay tickets for their latest concerts have reached record high with about a 50% profit margin going to scalpers about 2 weeks after they were sold out at the counter. There’s a good article in the JEP on the ‘demand for live music’ by peter earl somewhere… will see if i can dig it up.

  2. Peter
    June 20th, 2005 at 22:22 | #2

    I think the debate arises because most people, with the exception of economists, have a deep-rooted moral objection to arbitrage: it seems unfair that someone can make money simply from being lucky, or knowing more than others, or by taking a risk. Of course, this objection ignores the possible downsides for the abitrageur, all of which are very real if you try to make your living this way. The objection also ignores the value added by the arbitrageur.

  3. Joseph Clark
    June 20th, 2005 at 22:51 | #3

    Is the objective of the concert to raise money for charity or to keep poor students happy?

  4. Andrew Reynolds
    June 20th, 2005 at 23:30 | #4

    Peter,
    Just a quick correction. Arbitrage, by its very nature, involves no risk – it is the simultaneous purchase and sale of an item (or items) for a profit.

    What scalpers are typically involved in is not this – they are taking a risk that the tickets will not sell for what they paid for them. The risk may pay off or it may not. Normally, it does because bands cannot be seen to be ‘ripping off’ their fans with high ticket prices. The result is scalping, where the excess value can be captured by the early purchasers for resale. Of course, if they already have a committed purchaser when they buy the tickets it is arbitrage, but I think this would be rare.

    In this case, though, Geldof could easily seen the excess value being captured by the charity – a simple Dutch auction would have done it.

  5. observa
    June 20th, 2005 at 23:50 | #5

    Geldof’s a priori contract with lottery ticket buyers is personally OK with me and you enter the contract similar to buying an airline ticket. ie only the purchaser can travel. Whether he (actually the beneficiaries) would have been better off by extracting the maximum economic rent out of each ticket, via an auction, is practically unknowable, unless two identical concerts were sold both ways for comparison.

    My offered preference on Monday Message Board for discussion, really applied to full commercial events like AFL GFs, Formula1 and the like, although clearly Olympic and Commonwealth Games eventing could be included here. I guess as a Port Power fan, who managed to get a ticket to the AFL GF last year, I shouldn’t grumble. However, the allocation of tickets seemed less than satisfactory to many and the ideal situation would have been for our group of 9 to be able to bid for any available seat(clearly not members and dignitaries,etc) of our choosing. Actually at the end of a week of begging, the grapevine, and ringing through to two PAFC members lotteries, 9 of us gained a block of 4 seats, 2 seats, a solo seat and 2 standing. We paid prices of $70, $135 and $150 as I recall. We would have been prepared to pay considerably more to sit together and guarantee seats well before the Thurs morning of the last phone in lottery, with eleventh hour transport and accommodation to organise.

    Clearly with an event like an AFL GF, the supporters of the 2 protagonists are the most likely to outbid allcomers from non-participating clubs, yet members of those clubs get allocated scarce tickets. The opportunity to extract this economic rent is clearly there for the lucky(unlucky?) seat-holders who are not that keen on going. Why shouldn’t the AFL extract that economic rent themselves? Ultimately that extra revenue can be returned to the sport and or its patrons, if by no other means than via cheaper minor round ticket pricing.

    The internet means are now there to produce a perfect market clearance for all GF seats. Click on the MCG seating site and bid for any seat in the arena, allowing a maximum which will automatically gazump another bidder. Probably all bidders would be charged a nominal administrative fee to participate, whether they ultimately purchase a ticket or not. You would be able to place a maximum bid at any time for any seat and have it automatically redirected to the next lowest priced seat/s (in blocks for a group booking), or override it manually. The auction could begin at the start of the finals, as a guide to prices, with prospective purchasers nominating the team they follow(or neutral). As soon as the Grand Finalists are declared, all non-Grand Finalist supporters can withdraw their bids with prior declared neutral and Gf supporter bids remaining. The auction would then begin in earnest. Notice that with bidders declaring their support, new bidders have the option of choosing seats with their own fan base. Who knows what prices such an auction would produce? Perhaps seat prices as high as $5000 and down to $5 to fill every seat.(with the admin fee on top of these bid prices naturally) There would be no scalping under such a regime of photo identified entrants and patrons could plan with certainty. Not a bad idea with MCG memberships too come to think of it and perhaps the flunkies and hangers on at an AFL GF should have to pay market prices or miss out.

  6. Peter
    June 21st, 2005 at 06:39 | #6

    Thanks, Andrew, if I used the term “arbitrage” incorrectly.

    London’s West End theatre business survives because of the activities of independent intermediaries who buy large numbers of tickets in bulk at the time a new musical or play is announced, which they then resell at a profit to tourists (or not, if the musical or play attracts no customers). Such intermediaries serve a valuable marketplace function, effectively buying uncertainty from the producers of the musical/play, and undertaking retail marketing. This is the same activity as undertaken by consolidators in the travel industry, airtime resellers in the mobile comms market, wifi service resellers, bookshops, etc, etc. I don’t see any difference between this activity and ticket scalping, yet in many countries (including Britain), ticket scalping is illegal.

    Why should Strathfield Car Radio or STA Travel be allowed to resell something, but not John Q. Citizen? In Britain, I would say the answer can be given pretty much in terms of the accent (a proxy for social class) of the reseller. It is to Mrs Thatcher’s lasting credit that she seemed less prone to favour people with a certain accent than either her forebears or her successors.

  7. derrida derider
    June 21st, 2005 at 09:42 | #7

    Joseph Clark hits the nail on the head – this concert is *not* supposed to be about making attendees happy but about raising aid money. John Q claims the would-be ecorats are starting their analysis too late in the process – ie after the sales. But he’s the one starting the analysis too late, by starting after the decision to underprice.

    Put it this way: the decision not to maximise revenues represents a transfer from Third Word peasants to randomly chosen British music fans.

  8. Razor
    June 21st, 2005 at 12:23 | #8

    I think they should have run what I believe are called Dutch auctions – the price starts high and falls and the market is ultimately cleared.

    Geldof makes me want to puke with his ‘holier than thow’ attitude. He made millions from selling crap to the feeble minded and now he wants others to forgoe economic opportunities. Perhaps he should spend more time on his personal relationships and his his kids would have a Mum.

  9. June 21st, 2005 at 12:36 | #9

    A little OT, but I was reading Geoffrey Parker’s history of the Dutch revolt, and noted that they had a betting market on the election of the Pope in the Netherlands in the 16th Century.

  10. Jim Birch
    June 21st, 2005 at 14:34 | #10

    I should have realized observa was a Power fan.

  11. Terence Wood
    June 21st, 2005 at 18:15 | #11

    Derrida derider and other posters,

    sigh…I am explaining the obvious here but:

    The purpose of Geldof’s concerts is not, I would imagine, just to make money. No matter how well these concerts do, the money they raise – compared to the amount needed – will be pretty small. Obviously, the money they raise is still very significant to those people who’s lives are saved by it and as such – own there own – benefit concerts are still a worthwhile idea. However, Geldof is aiming for more than this – he wants to significantly decrease world poverty (whether his policy prescriptions are right or wrong is something for another debate).
    As such, his concerts have other desired accomplishments as well. Such as making a statement to politicians and raising people’s awareness of extreme poverty.

    For these reasons the goodwill of people attending the concerts is – completely legitimately – something that Geldof ought to be concerned about.

  12. gordon
    June 22nd, 2005 at 12:05 | #12

    Mmmm… readers of George Monbiot’s discussion of the roles of Geldof and Bono might think that the business ethic arguments for scalping and arbitrage are not so far off the mark (http://www.monbiot.com/ see under “Bards of the Powerful”). If you go there, look at his analysis of the G8′s Africa debt reduction program (same page, “Spin, Lies and Corruption”). It’s more interesting.

  13. observa
    June 22nd, 2005 at 12:47 | #13

    “I should have realized observa was a Power fan.”

    You didn’t reckon us traditional, working class blokes would be into a gaggle of chard sippers and their johnny-come-lately club of many colours, did you Jim? A murder of crows! How fitting.

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