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Wednesday, November 30, 2022

The Economic Theory That Shows Ticketmaster Didn’t ‘Rip Off’ Taylor Swift Fans

The concept of demonstrated preference teaches that actions speak much louder than words.

Image Credit: Ronald Woan-Flickr | CC BY-SA 2.0

Ticketmaster, a long-time target of free-market critics, is again under fire in light of the Taylor Swift pre-sale controversy.

Many fans have complained about tickets being too expensive—the price for upper-tier tickets soared to $22,000—in the first wave of pre-sales. Even some of Swift’s most ardent fans have expressed frustration at the high ticket prices. The indignation has spurred calls from lawmakers to break up Ticketmaster.

The issue in their view is that the firm has monopolistic price-setting market power. Superficially, it may seem reasonable to take antitrust action against Ticketmaster, but such a knee-jerk reaction is predicated on shallow logic. Few commentators have shown skepticism of the accusations of predatory practices.

The answer to this question of the firm’s predation is a contrarian one. No, Swifties are not getting exploited by Ticketmaster. They are vying to purchase pre-sale tickets to one of the most hyped and best-selling musical artists on the planet. The prices seem exorbitant, but divesting Ticketmaster into smaller firms will not substantially lower ticket prices, as it is not their market position that significantly increases ticket prices. Rather, Taylor Swift’s fan base is most likely the actual cause for the spike in ticket costs. 

What is Dynamic Pricing?

In order to balance supply and demand, Ticketmaster uses a system called Dynamic Pricing.

Dynamic or Surge Pricing is a pricing scheme where prices adjust in real-time to reflect market conditions. Generally, the application will use algorithms to adjust the price based on demand, which is a quicker way of updating the market information expressed in prices. Rideshare apps such as Uber utilize this pricing strategy to account for market demand and other conditions, such as inclement weather. In the example of rideshare applications, the higher prices cover and provide a compensation differential to drivers, incentivizing them to take passengers. This practice may seem predatory, but it is necessary for the inventory management of a popular service. The same principle applies with concert tickets.

As the prices of tickets go up, fewer fans will be buying tickets, so the supply of concert tickets will eventually match the demand. In the case of the Taylor Swift pre-sale tickets, consumer demand propelled ticket prices upward.

Ticketmaster was only responding to changes in the market. 

Remember: Value is Subjective

To claim that the ticket prices were “prohibitively costly” or that dynamic pricing is “exploitative” is a matter of opinion. It is also evident that not all of Taylor Swift’s fans genuinely agreed that they were ripped off. Why?

The key thing to remember here is that value is subjective. Ultimately, the amount of labor that goes into producing a good does not determine its value; the subjective appraisal of the consumer is what determines the value. Fans can give lip service to the idea that Ticketmaster was overcharging them, but if this was really true, the tickets would not have sold in the first place. 

There is an old saying that actions speak louder than words, a sentiment that economist and libertarian theorist Murray Rothbard would agree with.

In Rothbard’s essay Toward a Reconstruction of Utility and Welfare Economics (1956), he describes the concept of “demonstrated preference.” Essentially, we can determine an individual’s preferences based on their actions. Frequently, we see people making decisions antithetical to the opinions they verbally express. The current complaints thrown at Ticketmaster are a good example.

Many fans verbalized grievances but still chose to purchase tickets. But there is no defensible explanation for why someone purchased a nonessential luxury good and then griped about the expense. Fans could have waited to see if ticket prices might decrease or to put aside more money for the occasion. If someone purchased tickets, it is reasonable to conclude they valued attending the concert more than the money spent, regardless of what they say. 

The True Value of Taylor Swift Tickets

Prices play a crucial role in bridging information asymmetries between vendors and consumers. High prices (in the absence of price controls) tacitly communicate to customers that there is a relatively low supply of a good compared to demand. Low prices conversely reflect a large stock of a good, so the feedback between prices and demand indirectly communicates market information.

How do we recognize the correct price for goods or services, such as Taylor Swift tickets? The answer is price discovery. Under the conditions of market competition, businesses try to find the price where they will make the highest possible revenue while still attracting customers. Dynamic Pricing is invaluable to this process as it provides instant feedback to both the seller and buyer. Politicians and fans might claim the tickets were too expensive, but how would they know? They can only reference past conditions that do not apply to this situation.

Ticketmaster and Taylor Swift fans were in the process of finding the correct price for pre-sale concert tickets, which could very well be higher for this occasion than it has been in the past.

Some critics of this approach may cite the fact that concert tickets for other popular artists command a lower price tag. This observation is only tangentially relevant to this debate. In the overall market for concerts, tickets to see Taylor might be colossally valuable in comparison to other artists. These might be similar goods, but are they truly the same? Not all singers have the same quality of music, branding, and stage performances. If the public values these attributes, the concert tickets should sell for more money.

Taylor Swift is renowned for her energetic stage performances, she is an eleven-time Grammy winner, and a master of branding and marketing. Taking all of these variables into account, Ticketmaster’s Dynamic Pricing revealed that the so-called “fair price” promoted by politicians and disgruntled fans actually undervalues the experience of seeing her perform live.

  • Peter Clark is a blogger and enthusiastic advocate of free-market economics. Find his work on Medium.