Dr. Laband is Professor and Head, Department of Economics, Auburn University, Auburn Alabama.
New York Attorney General G. Oliver Koppell filed suit recently against two New Jersey ticket brokers for allegedly scalping tickets to a Barbra Streisand concert. In New York, it is illegal to resell tickets for more than 110 percent of their face value. As reported in my hometown newspaper, Mr. Koppell said the brokers “charged $325 each for two tickets worth $125 apiece.” Last year country and western superstar Garth Brooks urged a legislative committee in Tennessee to make ticket scalping illegal in that state. Currently, ticket scalping is illegal in 12 states.
Clearly, Mr. Koppell’s statement is incorrect: It would be impossible to sell tickets worth $125 each for a price of $325 each. Language aside, the anti-scalping stance adopted by Messrs. Koppell and Brooks and a significant number of state legislatures reveals a stunning ignorance of the fundamental role that prices play with respect to allocating scarce commodities.
People Who “Need” Tickets
The selling price of any commodity automatically divides the potential consuming public into two groups: individuals who value the item highly enough to be willing to pay the price required to obtain it and those who do not value the item highly enough to be willing to pay the acquisition price. In economic jargon, prices are allocatively efficient. Assuming no government intervention, goods and services—including concert tickets—are automatically allocated via prices to those individuals who value them the most highly, because they are willing to pay the most to obtain them.
The heart-rending response from supporters of anti-scalping legislation is that allocation by price is not “fair,” since poor people cannot afford to pay high prices for commodities even though they might value them highly. This argument is demonstrably wrong. The mere fact that a resale market emerges for tickets to concerts, athletic events, and the like indicates that the face value (or retail price) of the tickets is below the market-clearing price.
Whenever a concert, for example, is a “sellout” before exhausting the number of demanders of tickets, it should be clear that there is a shortage of tickets at the retail price. This must mean that certain individuals who place a greater value on the show than the money price of the tickets will not get to see the performance. Individuals who are willing to pay a higher price for the tickets and who want to ensure that they will in fact receive tickets must be willing to pay a higher price, typically in the form of time spent waiting in line. Since poor people have a low opportunity cost of time, they are more likely to be the ones who receive tickets because the total (time + money) cost of the tickets is lower to them than to rich people.
Consider the allocative effect on poor people of prohibiting resale of concert tickets. Smith can earn $5 per hour; if he works 40 hours per week, 50 weeks per year, his annual income is $10,000. Jones can earn $50 per hour; under the same assumptions about work effort, her annual income is $100,000. Garth Brooks comes to town in concert. Tickets are priced at $25 each. Smith values the opportunity to attend the concert at $80; Jones values that opportunity at $480. Both individuals forecast that the concert will be a sellout and that in order to actually obtain tickets, an individual will have to spend the equivalent of ten hours waiting in line.
Even though the value that Jones attaches to attending the concert is six times greater than the value Smith places on the concert, she does not bump into Smith in the ticket line. She is not there. Under the circumstances outlined, Smith will find it worthwhile to wait in line for tickets while Jones will not. Smith values attending the concert ($80) at more than the real price he must pay for the ticket (ten hours in line times $5 per hour, plus the $25 nominal ticket price equals $75). By contrast, the real cost to Jones (ten hours in line times $50 per hour, plus the $25 ticket price equals $525) exceeds the value she places on attending the concert.
If resale of tickets is illegal Smith attends Garth Brooks’ concert, even though he attaches a total value to it that is less than Jones’ total valuation ($80 < $480) and even though the net-of- cost value to him is lower than it is to her ($5 < $45). If resale is legal, however, both parties will be happier.
Jones is willing to pay far more than $25 for a ticket, provided she does not have to wait in line. She is potentially willing to pay up to $480 for a ticket. Smith, whose procurement cost of a ticket is $75, would part with it for any price greater than $80, because the value of the money received would then exceed the value he attaches to attending the concert. Indeed, he would part with the ticket for less than $80, because the time he would have spent attending the concert is valuable too. If Smith, scalawag scalper that he is, offers to sell the ticket to Jones for $225, she is ecstatic. The net-of-cost value to Jones of attending the concert has, through Smith’s offer, been altered from a negative $45 to a positive $255. When she agrees to the exchange, Jones is ecstatic also. He has earned four times as much per hour as he does in his ordinary employment. In so doing, he has provided a valuable service to Jones.
The argument generalizes to concerts and other events that do not sell out. Certain seats are valued more highly than others. Whenever individuals are prohibited from buying tickets in a resale market (i.e., from scalpers), some individuals who value those good seats more than the current ticket-holders simply do not attend.
The number of items sold through resale in America each year utterly swamps the number of items sold new. Land, houses, airplanes, clothing, artwork, stamps, guns, and a myriad of other items change ownership each year. To apply consistently the principle of “no scalping,” we should make it illegal for individuals to sell any of these other commodities at prices greater than what they paid originally. This would be simply absurd. Such a restriction would eliminate any incentive for individuals to shift their supply of commodities intertemporally. Owners would have no reason to conserve goods and resources today to ensure future availability.
Although it may look as though scalpers buy tickets at low prices and immediately turn around and sell them at much higher prices, the perception is misleading. What is really being sold in the resale market is time. If Garth Brooks would truly like to maximize the value that people receive from attending his concerts, he should be testifying against proposed anti-scalping bills. And, unless I’m much mistaken, state legislators and attorneys general have more pressing issues to address than the mucking up of resale markets that increase society’s well-being.