Pearl Jam vs. Ticketmaster: A Holy War on ReaIity
The Best in the Business Get Caught in the Web of Antitrust Law
MAY 01, 1995 by CHARLES BILODEAU
Filed Under : Monopoly, Economies of Scale
Bilodeau received a bachelor of science in geography from Florida State University in 1992.
The lawsuit initiated last spring by the rock band Pearl Jam against Ticketmaster has once again brought antitrust laws into the limelight. Time magazine has called the legal battle “Rock ‘n’ Roll’s Holy War. “ According to Pearl Jam, Ticketmaster is intending to monopolize the ticket service industry. What is the truth of the matter? To find out, let’s look at some of the charges against Ticketmaster in the context of antitrust laws.
In a memorandum filed with the Antitrust Division of the U.S. Department of Justice on May 6, 1994, Pearl Jam asserted that Ticketmaster has a “virtually absolute monopoly on the distribution of tickets to concerts.” What constitutes a “virtually absolute” monopoly? Patent law creates monopolies (single seller positions) in inventions and innovations; copyright confers monopolies in literary/artistic works. Pearl Jam has a legal monopoly on any songs and performances they create, as they should. Does Ticketmaster have a similar monopoly on tickets? No. Ticketmaster had competition, but its rivals could not manage to compete.
According to Rolling Stone magazine, Ticketron, the largest competing ticket service, sold out to Ticketmaster in 1991, after losing millions of dollars a year from 1988 on. Why would Ticketron lose millions of dollars a year, while Ticketmaster turned a profit? Ticketron must have operated less efficiently. In ticketing, as in any contested market, the companies (or company) that survive will be the ones who best cut costs, find new markets, and plan long-term. In other words, the survivors will be the ones who make the best business decisions. Understanding this is vital to understand the “anti-competitive” practices that Pearl Jam’s suit hopes to stop.
What are these “anti-competitive” practices? The Rolling Stone article by Neil Strauss and Tom Dunkel provides some examples: “Ticketmaster, it’s claimed, keeps ticket sales organized and revenue high. This is often at the expense of fans, however. The service charges that Ticketmaster adds to tickets range from $3 to $6 and can add more than 30 percent to a ticket’s face value.” The suggestion here, that Ticketmaster’s activities make fans worse off, involves an economic fallacy. The error, known to economists as the “physical fallacy,” is examined below.
The article goes on: “One reason these surcharges are so high is because Ticketmaster pays a small fee to venues or promoters for every ticket sold in order to maintain its exclusive contracts with them. … Ticketmaster has even loaned promoters money to meet the guarantees of stadium acts and has given money to venues for promotion and marketing…. Several recent lawsuits call Ticketmaster dividends to venues ‘kickbacks.”‘ Ticketmaster, in other words, is securing long-term arrangements. The money Ticketmaster loans or gives to arenas or promoters to meet guarantees is money spent to insure that the show will be performed.
The question to ask yourself (as an arenarock fan) here is: What would I rather have? Fifty extra cents in your pocket is of little use to you when accompanied by a ticket to a show that has been canceled because the venue couldn’t meet its guarantees. Ticketmaster likely started these loans and promotion subsidies in response to people who complained after shows were canceled, i.e., to better serve the same people Ticketmaster is now charged with ripping off. These policies for insuring that concerts will be performed are construed as “anticompetitive” because a small-scale ticket service might be unable to duplicate them. Yet everyone benefits: the fans, the performers, and the venue. Is this somehow unfair?
The “Physical Fallacy”
The article contains an interesting statement by one of Pearl Jam’s guitarists, Stone Gossard: “Our band, which is determined to keep ticket prices low, will always be in conflict with Ticketmaster.” To judge the truth-value of that statement, a discussion of the “physical fallacy” is in order.
The basic point is that economic value doesn’t just depend on a good’s physical features; value can also depend on where or when the good is available. By bringing a good from the producer to the consumer, a middleman can add value to that good despite the fact that the middleman has not changed (added anything to) its physical shape. Let’s consider what value Ticketmaster might be adding to the tickets they convey.
When a rock band goes on tour, they have to be selective about the types of venues and number of sites they will play. It would be as unsuitable for Pearl Jam, a band with a large national following, to play at local nightclubs as it would be for a local garage band to play at Madison Square Garden. Pearl Jam typically plays big-city arenas (such as the homes of NBA teams). Small-city venues would offer the band less of a chance to recoup expenses. As well, touring can be a grueling thing. There is a limit on the number of shows any group can perform, before touring’s effects start to show up on stage. Some cities, then, will have to be avoided.
Imagine a hypothetical Pearl Jam fan who lives in Bakersfield, California. Suppose that Pearl Jam has decided to tour once again, but not to perform in Bakersfield, because the population of Bakersfield is too small, and they are going to play a number of shows at the Forum in Los Angeles 75 miles away. Our hypothetical fan, Suzy, is a teenager who works part time at the Taco Bell near the mall for minimum wage while going to high school. She is a dedicated Pearl Jam follower, and would not think of missing them. If Ticketmaster did not exist, and the only source of tickets to the Pearl Jam concert was the Forum box office, what options would Suzy have? She could wait until the night of a show and drive down to L.A., but if all the shows had sold out beforehand, she would either have to pay a scalper’s price or drive home disappointed. Her only other option for securing a ticket is to drive to the box office to get tickets at the first chance possible.
What is involved here? Not only the hassle of having to drive 150 miles just to get tickets (and drive again the night of the show), but whatever else Suzy could have done with the time it took to get to L.A., get to the Forum, and wait in line (remember that the Forum box office is now the only source for tickets) and drive back to Bakersfield. How long would this take? Even at the best times for driving, three hours minimum; with L.A. traffic and the wait in line added in, possibly four. What does this mean for Suzy? Suppose she takes time off from her job to make the ticket run, sacrificing $4.25 an hour. Multiply $4.25 an hour by four and you get $17. Add $5 for gasoline and you get $22. This is the value Ticketmaster adds by making tickets available at Suzy’s favorite record store (Tower Records) in Bakersfield. Even if Ticketmaster charges her $6, Suzy has saved $16. And we haven’t even considered the wear-and-tear on her old Toyota.
Sure, not everyone lives 75 miles from the closest Pearl Jam venue. But almost everyone lives closer to a Ticketmaster location than to such an arena. The ticket company, in fact, sees to that. Ticketmaster places its outlets in malls, music stores, and other right-on-the-way places, precisely so that most people will find its service charges worth paying. A trip to Ticketmaster, service charge included, is less costly than a trip to the arena box office.
Economies of Scale
If you believe that having “competition” from other ticket services would drive down the price of Ticketmaster’s fees, you are wrong. Why? Economies of scale. Ticketmaster was able to “monopolize” ticket sales because they were the most efficient in utilizing economies of scale. Their larger network of outlets operates at lower cost per ticket sold than smaller firms could manage. (If not, smaller firms could spring up to sell Pearl Jam’s tickets.) An antitrust ruling against Ticketmaster would work against the efficiencies that economics of scale allow.
Antitrust laws are at war with economic reality. The only way that Ticketmaster could have allowed the “little guys” to remain in business would have been to raise their fees to match the inefficiencies of these “little guys.” Such “price fixing” is no favor to consumers, and is also illegal in the screwy world of antitrust. So what were Ticketmaster’s options? Keep prices artificially high and be sued under antitrust statutes for “price fixing,” or make use of economies of scale and be sued under those same antitrust laws for “intending to monopolize.” Ticketmaster is only the latest firm caught in the arbitrary, contradictory world of antitrust, for no other reason than that they were and are the best in the business.
A coercive monopoly, i.e., a seller whose potential competitors are excluded by government force, can raise prices and limit quantities with impunity. The post office is a good example. But Ticketmaster is not backed by the government, and competitors could enter the field if they had a better method or organization. The methods of “coercion” described by complainants against Ticketmaster are not coercion at all. Ticketmaster has a right not to deal with anyone it does not wish to. What if arenas refuse to book certain bands because they are afraid that Ticketmaster won’t do business with them? I cannot think of a more telling sign that a business firm has its act together than that people fear the loss of its services. And if the owners/managers are afraid that Ticketmaster will not do business with them, doesn’t that mean Ticketmaster is leaving room for the “little guys”?
Consider what will happen if antitrust law is used to break up Ticketmaster. Remember that Ticketmaster’s largest competitor (the one with the largest economies of scale) was losing millions of dollars a year trying to compete. What does this mean? Millions of dollars a year in extra fees will have to be paid to compensate for the inefficiencies of lack of scale. If Ticketmaster’s “kickbacks” to promoters (to insure that shows take place) are ruled illegal, the number of show cancellations will rise. What will happen if another recession hits? In 1991, the concert industry was devastated. There were only two rock tours that year (that I can remember). One was Guns ‘n’ Roses, arguably the most popular rock band in the world at that time, the other was Perry Farrell’s Lollapalooza tour. It is no coincidence that Ticketron finally gave up and sold their remaining assets to Ticketmaster. It is also significant that no potential competitor has (to my knowledge) stepped forward since the suit began, saying that they could do a better job than Ticketmaster. An antitrust suit ruling against Ticketmaster will mean lost jobs.
Kelly Curtis says that, “All [Pearl Jam] wants to do is to be able to tour with a cheap ticket price.” This is not what Pearl Jam wants to do. Pearl Jam wants to use Ticketmaster’s service while dictating to Ticketmaster what fees Ticketmaster can receive, despite the fact that Ticketmaster makes its profit by decreasing the cost of tickets relative to individual ticket buyers.
What can Pearl Jam do to keep the tickets cheap? They could take a lesson from the Lollapalooza tour, and lower their own base ticket price. Farrell’s tour had six bands, an average ticket price of only $25, and it still made money during a recession. How? By not playing expensive venues. It was a tour of fairgrounds, where facilities, and correspondingly, venue fees were modest. Even if Pearl Jam takes along an opening act, it is unlikely that they would have more than one third the number of musicians of Lollapalooza, so the gate will not have to split as many ways. Ticket scalping–the result of unsatisfied demand at the intended price–can easily be reduced by simply adding more shows until the market is saturated. Unlike the Forum, where there is no chance of adding another show if the Knicks are playing the Lakers the next day, a fairground can easily add dates as the initial shows sell out.
Pearl Jam does have alternatives to making an arena tour and using Ticketmaster’s service. They have exercised one of them by not touring. If they truly want to provide a show at a low cost to their fans, they have options there, too. It is in both Ticketmaster’s and Pearl Jam’s best interest to realize exactly what they do for each other. Ticketmaster could not exist without entertainers, and Pearl Jam (and fans and venue managers) is better served by Ticketmaster than by anyone else who has appeared. It remains to be seen whether Pearl Jam will actually learn this before their fans desert them for bands that do tour.
3. See J. D. Gwartney and R. L. Stroup, Economics: Private and Public Choice (New York: Harcourt Brace Jovanovich, Inc., 1990). The term “physical fallacy” was introduced by Thomas Sowell in his Knowledge and Decisions (New York: Basic Books, 1980), pp. 67-72.