Research

Scurrilous or savvy? Free market and the practice of ticket reselling

Witnessing the arrest of a man buying a ticket outside a World Series game angered Stephen Happel enough to spur him to begin researching the common (though often illegal) phenomenon of secondary markets for event tickets. "I'm a free-market economist who loves to see voluntary exchange that benefits everyone," says Happel, a professor of economics at the W. P. Carey School of Business. A free market for tickets, he argues, benefits the teams and fans alike. But the secondary marketplace has expanded beyond the guys who peddle tickets on the corner before game time. Choosing to join what they have been unable to beat, teams are getting in on the action.

2005-07-06

Stephen Happel still gets worked up recalling the moment he chose to devote some of his research time to the ticket industry.

The W. P. Carey School economics professor had traveled to St. Louis to attend the 1987 World Series. Outside the stadium he saw a college student from Oklahoma — a die-hard Cardinals fan — wearing a sandwich board that announced his quest to obtain a ticket to that night's game. As soon as he succeeded in making a purchase the scalper was arrested and the tickets were confiscated.

"I said, 'For what? Why are you arresting this guy?'" Happel exclaims. "It's only a game!"

Happel's indignation led him to develop a research interest in secondary markets for event tickets. As a sought-after source for media and for testimony before legislatures mulling the issue, Happel is a vociferous defender of those seeking to make a living by reselling tickets.

According to the National Association of Ticket Brokers, 10 states put restrictions on resale prices. If Happel had his way, regulation would be confined to the crooked ways some brokers acquire their tickets and counterfeiting.

"I'm a free-market economist who loves to see voluntary exchange that benefits everyone," he says. "There's no way I could ever sit on the 50-yard line unless there was scalping. There's no way for Stephen Happel to go to the Super Bowl, ever. Ever. It benefits the little guy, ultimately."

The argument for letting the market set the prices of tickets is multi-layered. Fundamentally, it's the way retail business is done. A free market for tickets benefits the teams, who have already collected the face value of the ticket, by making sure people enter the arena and purchase concessions or merchandise. It reduces the possibility of a black market and cuts back on corrupt practices such as bribing box-office personnel or engaging in counterfeiting. And it holds down prices through competition among brokers.

"I'll go to my death arguing [price controls] won't work," Happel says. "Any time there's a price control, I can predict with 100 percent certainty, there will be times when demand will far outpace supply."

Crumbling barriers

Indeed, the argument for letting the market set the price is slowly being endorsed - in action if not words - by the traditional enemies of the practice. Two high-profile cases involving professional teams (the Seattle Mariners and Chicago Cubs) and their fans highlight the issue.

In 2001 the Seattle Mariners teamed with a company named Liquid Seats (now StubHub.com) to provide a forum on the team's Web site where season-ticket holders could sell tickets they weren't able to use.

The team and Liquid Seats each pocketed a percentage of the sales. No limits were placed on prices, except for sellers living in Seattle, which had a law against selling tickets for above face value. Seattle ticket holders circumvented that restriction by using alternative, out-of-town shipping addresses. The Mariners also used the site to sell prime seat tickets, with no face value, for $125.

At the same time, the Mariners hired off-duty Seattle police officers to aggressively pursue individuals selling tickets outside Safeco Field. Two were arrested and one was convicted. On appeal the defendants argued that in enforcing the city's anti-scalping law outside its stadium the Mariners intended to blunt competition from scalpers for their new Web-based service. A judge overturned the conviction and dropped the charges against the other defendant.

Then in 2002, the Tribune Co. - owners of the Chicago Cubs — invited a public-relations maelstrom with its establishment of Wrigley Field Premium Ticket Services (WFPTS). The problem, from a fan's perspective, was that the only tickets the broker sold were Cubs tickets, and these were "sold" by the Cubs to the broker, who upped the prices.

A couple of fans sued the Cubs for fraud and deceptive practice and lost. A court determined that no law specifically prohibited teams from owning brokerages. In fact, Illinois has no law against the resale of tickets for any price, as long as the reseller is a licensed broker.

Given the higher prices in the secondary markets, an argument could be made that teams are under-pricing their tickets. If so, one plausible explanation is goodwill. It's ironic that the Cubs, unique in their ability to sell out or nearly sell out each home game despite league standings, invited bad publicity with WFPTS, and got it. Nevertheless, business is still booming.

Fewer and fewer free-market foes

The Mariners and the Cubs are sensational examples of sports franchises joining what they cannot beat. Team-affiliated secondary markets are becoming increasingly prevalent in professional sports. Nine Major League Baseball teams (out of 30) now offer a forum through their Web sites for season-ticket holders to resell tickets, while 10 National Basketball Association franchises do the same.

"Teams are getting smarter," says James Kahler, executive director of the W. P. Carey MBA Sports Business and former executive for the NBA's Cleveland Cavaliers.

"The key to their business is retention. I think more teams ought to be doing it."

— James Kahler, executive director of the W. P. Carey MBA Sports Business

Kahler says it costs six times as much to gain season-ticket holders than to keep them. Team executives say that providing a platform for the resale of their tickets is just another service for its most valuable customers. The seller charges what he or she likes, and the team and the ticketing agency (Ticketmaster for the NBA teams involved) each get a fee from the transaction.

John Walker, the senior vice president of business development for the Phoenix Suns, says his team's service offers online and authentic-ticket security to the season-ticket holders. It benefits the team more than just through the collection of a service charge.

The Suns started the partnership in 2001 as a response to a growing number of game-time no-shows — to be avoided even though the team has collected the price of the tickets. Nothing looks worse to fans and TV cameras than empty seats. And, when people come to the arena they pay for parking, concessions and merchandise and courtside advertisers get the exposure they paid for.

"I think its time has come," says Walker of these in-house secondary markets.

The Suns, who made it to the Western Conference finals before being eliminated by the San Antonio Spurs on June 1, have seen their sold-out dates rise from six in 2003-2004 to 27 in 2004-05. With the team's success this season, that number should go up again. Walker says less than 20 percent of the Suns' season-ticket holders have used the service; competition with independent brokers and eBay is still a factor.

"There's free market everywhere," Walker says. "We in no way are trying to control it. It's unrealistic to think we could." The team's success demonstrated that the free-market supply-demand cycle was in full operation - more wins generated higher use of the service and bigger markups.

"We're really happy," Walker says. "The last thing you want is someone telling you, 'The tickets just sat in my desk.'"

The future of the secondary market

Marianne Jennings, a professor of legal studies at the W. P. Carey School, worked with Happel in 2002 to write "Creating a Futures Market for Major Event Tickets: Problems and Prospects" for The Cato Journal.

Jennings says teams are crying foul less often as more implement the broker model. And, many teams now have tiered pricing determined by seat location and/or anticipated demand, as well as resale services for season-ticket holders. NBA teams that didn't offer resale services have offered ticket forwarding instead — another Ticketmaster partnership. Season-ticket holders can, up to two hours before a game, e-mail their tickets to anyone they choose. The tickets are then re-bar-coded. No mention of pricing appears in the instructions.

"The arguments for restricting ticket sales have fallen by the wayside," Jennings says. "The one I heard in New York recently when Broadway argued against a free market was that they would lose money and be forced to shut down because Broadway producers can't overcharge for tickets — high prices would cause a public relations nightmare. They have to maintain lower prices or the public will react negatively. It's the same argument I heard from Bruce Springsteen in the 1980s. He wanted to keep his ticket prices low so that his true fans could attend, and he didn't want to be seen as a price gouger."

Both Springsteen and Broadway producers fail to realize that the primary and secondary market are two distinct and separate markets, Jennings says.

"The primary markets price their tickets as all rational business people do: they set the price to ensure survival," Jennings explains. The price of the ticket covers the costs of the show/arena/team. "What they never discuss is that they own the biggest portion of the primary market, which consists of the ancillary items — everything from the programs to the T-shirts to the hot dogs and popcorn. Ticket brokers can never tap into that market, and it is a high-margin segment of the primary market."

The secondary market is distinct and separate, Jennings adds. "It consists of buyers who don't have time to wait in lines — buyers who, on a whim, want to attend an event, and buyers who have, as one witness in the New York hearings put it, expense accounts and the sky is the limit."

Because of the nature of changing demands for limited-forum or one-time events, the secondary market will always exist, she says.

"There is always a buyer at the last minute," Jennings says. "The presence of this market does not, however, detract from the ability of those who promote and produce to profit in the primary market. And, they can join in on the secondary market activities as a ticket seller, ticket buyer, or, as some teams have done, as a broker for season ticket holders. There really aren't any credible arguments against brokers."

Happel adds that so far, the only solutions proposed to combat fraud and counterfeiting in the secondary market have involved ticket holders showing identification upon entrance. That means lines, and Happel says fans will never tolerate that. Kahler says teams are less concerned these days with scalpers and more with how to improve two areas: satisfying season-ticket holders and maximizing revenues.

"The guys in the street are the amateurs," he says. "This has become an industry."

Economics Faculty