Monday, July 11, 2005

L&S: Scalping and the Harm Principle

In his discussion of the Harm Principle, James briefly brought up the issue of scalping (though he quickly moved on to sodomy, bestiality, and other amusements). I’ve never found the argument against anti-scalping laws persuasive, and I think there’s a strong case for banning scalping as a matter of contract enforcement and property law. If I’m a landlord, I may include a prohibition on subletting in the lease, because I have the right to specify who may use my property and under what circumstances. If I’m a homeowner and I invite a guest into my home, my guest can’t transfer that invitation to a stranger. Likewise, if I own a sports venue or theater, I have the option of renting out seats to specific individuals. Tickets can be person-specific.

The usual economic argument in favor of scalping is that if Jones sells his ticket to Smith, then Smith must value the ticket more than Jones, and both Smith and Jones are made better off by the transaction. This analysis is correct but incomplete, because there’s another party to consider – Williams, the owner of the venue. For whatever reason, Williams has chosen to sell Jones a person-specific ticket, not an anonymous-occupant ticket. If so, then when Jones scalps his ticket, he’s selling something that’s not his to sell. Never having obtained Johnson’s consent for Smith to be present in the venue, he can’t sell that consent to Smith.

Now, if there is a market for scalped tickets, it does demonstrate that the current (pre-scalping) distribution of tickets for a given event generates less value to consumers than would a different (post-scalping) distribution. But venue owners have no obligation to maximize consumer value for a single event, and they may have very good reasons for not doing so. For instance, rock bands might care about creating an enthusiastic fan base. They want an excited group of young people to fill the mosh pit, go home and tell their friends what a great time they had, create more buzz for the band, and generate greater album sales in the future. To attract these fans, the rock band might (through its ticket distributors) want to lower prices, even if that means having excess demand for tickets and obtaining lower total revenue. But legal scalping could short-circuit this mechanism, because straw buyers could buy up all the tickets at the low price and resell them at the profit-maximizing price.


Anonymous said...

I'm not convinced that scalping is a bad thing from what you've said so far. Don't people with access (connections) and means (money) usually make out better financially in a free market world. If the Billionaire Butt Brothers think silver is going up they can corner the market by buying up all the silver (and really drive the price up as well). I don't really see why you are a socialist when it comes to tickets and not other commodities. If rock show promoters and organizers want to fill a part of the venue with a bunch of rowdy rats they will find a way to do that, I'm sure.

Anonymous said...

Your theory is flawed in a number of ways. First, the owner of the venue does not want to stop me from putting the ticket in the hands of somebody else -- he wants to stop me from selling it for more than face value. If I want to buy up a bunch of hip-hop tickets and distribute them to the ladies quilting bee at my church, that's perfectly fine.

The "enthusiastic fan base" argument also falls apart: Even among teenagers, there's a demand curve. The scalping ban lets the kid with only a marginal interest go to the show, but keeps out the kid with the band's name tattooed on his forehead. If their target fans are so enthusiastic, aren't they the highest value users? If so, won't they pay the highest prices anyway?

Anonymous said...

Scalping can be profitable because scalpers:

1. Have better (or more actionable) market information than promoters
2. Have lower transaction costs
3. Aren't concerned about public reputation
4. Have a higher risk tolerance

It seems they provide a valuable service to promoters by letting them know the true market value of their tickets. They expose an inefficiency that can be exploited by promoters in future events.

In any case, promoters are always free to screen for the most avid fans by increasing the non-monetary price (wait times, etc.) of tickets. Without compelling harm, given the political genesis of most of these laws, this seems like an odd time to wander off the free market reservation.


Gil said...

I agree with Glen that the promoter should have the right to control the sales of the tickets, even if it doesn't maximize the want-satisfaction of potential purchasers. And, even if it doesn't make sense.

However, I think that the others are right that if this is indeed what the promoter wants to do, he should stipulate it on the tickets, and since not every single promoter is so interested in such a restriction, I don't think a blanket anti-scalping law is warranted.

I think the real reason is often the frustration by the promoter that he isn't capturing all of the potential demand himself, and he'd rather deny it to others no matter what effect it has on the overall satisfaction of the purchasers. And, he gets to pretend to have noble motives, at the same time.

Maybe promoters should get more creative at sales mechanisms and use auctions to distribute the tickets.

Glen Whitman said...

"Without compelling harm, given the political genesis of most of these laws, this seems like an odd time to wander off the free market reservation."

On the contrary, I think what I'm saying is fully consistent with free-market principles. Property owners have the right to dictate the terms of use of their property. They can sell general admission if they want, but they don't have to. They can restrict the set of attributes they release to the public.

I do, however, I agree with Gil that a *blanket* anti-scalping law is unjustified. Ticket sellers need to specify that their tickets are person-specific if they wish to avail themselves of the state's contract enforcement apparatus. I would also concede that a high degree of self-enforcement would be justified in this case; if the venue owners really want to stop scalping, they should do most (if not all) of their own policing.

Z's points about the inefficiencies revealed by profitable scalping are correct, but only if taken in a vacuum. As I indicated in the original post, the venue owner may have perfectly good reasons to forgo short-run maximization of profit or consumer value, in order to create long-run benefits.