March 22nd had been marked on my calendar for about a solid month. That was the day that Lollapalooza (a music festival in Chicago) tickets were going on sale. Ok, ok, you might be thinking that this is ridiculous, “why does she have to buy them that day?”, “why is it that big of a deal?!” All valid questions to be sure. However, as anyone who has tried to buy festival tickets or popular Broadway show tickets will know, these things sell out fast.
I got to my computer a few minutes before they were going on sale to increase my chances of getting one of those highly coveted tickets. I have had similar experiences trying to buy other concert tickets and knew that if you are not able to buy them for face value on the site, your options dwindle to much more expensive tickets on secondary markets. The tickets became available and I clicked “buy”. I was taken to this “waiting” screen that noted that “with a high number of customers, our system is still processing your request”. I was talking to a few friends who had gotten through and were purchasing tickets but my screen was stuck in this perpetual waiting mode. I tried different browsers but to no avail. The screen eventually notified me (after about 30 minutes) that the tickets were sold out!
I was a little bummed that my attempts to buy a Saturday day pass Lollapalooza ticket were thwarted by a likely massive number of scalpers (with the advent of modern computing, ticket scalpers are able to submit thousands of requests for tickets at one time, often times crippling ticket sites), however, I knew that I could still get tickets (unfortunately at a much higher price) and that there was a logical economic explanation for this seemingly out-of-control market.
Why are these ticket sales so fast? Why are scalpers able to effectively and repeatedly profit from this ticket re-sale market? This rapid selling-out of tickets is something that happens yearly with Lollapalooza tickets. The concert organizers know this, the concert attendees know this, and the scalpers know this. But then why does it keep happening?
When I see people forming a line or rapid ticket-sales, I know that the price for the good or service is too low. Basic supply and demand illuminates this phenomenon and tells us that if the price is below the equilibrium level, there will be more quantity demanded for that good. $120 a day for a very popular and prominent festival is apparently much too low of a price to be selling tickets for. This is because immediately after the tickets were sold out, they appeared on StubHub for around $250 a day and they were being sold! People demanded these tickets even at over double the price of the original face value ticket.
So if these scalpers are consistently receiving revenues from their re-sale of tickets, why don’t the concert ticket sellers just raise the price of tickets to equilibrium levels, reap the benefits themselves, and price out the scalpers? There are some that have tried to overcome this problem, but for the most part, concert venues and festival organizers have been relatively unsuccessful at this. There are two main economic reasons why tickets are not initially sold at equilibrium levels, first, these festival organizers would like to preserve their reputation and secondly, they cannot effectively price discriminate.
When you picture a music festival goer who comes to mind? I would guess that you are probably thinking of a relatively young person who likes EDM, cheap beer, and crop tops. Festival organizers, along now with Broadway theaters, want to preserve their reputation of being affordable by providing quality entertainment that is accessible to people of diverse socio-economic statuses. They do not want to be known as organizations that have “high” ticket prices that price out young people and people of lower income brackets from participating in their brand of entertainment. They would like to provide, or at least appear to provide, tickets at a “reasonable” face value.
The second has to do with price discrimination. This is when firms sell the same product for different prices to various segments of the population. Think about student and senior discounts at the movie theater and “early bird specials” on certain products. This allows firms to capture revenue from segments of the population that have different elasticities of demand. Two conditions have to be met in order for a firm to successfully price discriminate. First, the firm must be able to identify distinct market segments that are different with respect to price elasticity of demand. Second, the firm must be able to enforce the different prices paid by the various segments of the population (there have to be few to no arbitrage opportunities).
Think about airline tickets, this is an industry that has been very successful in price discrimination. Depending on when you buy the ticket, prices fluctuate dramatically. Prices for flights far in advance are typically the cheapest and they get more expensive as the date of the flight approaches. This is to capture the customers that have very inelastic demand just a few days before the flight, who are willing to pay much more than those who planned ahead. Airline tickets cannot be resold because each passenger is IDed in order to just get past security and the name on their ticket is matched with their ID.
Concert organizers have not been able to successfully price discriminate with their ticket sales the way that StubHub and other secondary ticket sites have been able to. The prices for the tickets did fluctuate on StubHub, depending on how far away the concert was, this is because the numerous sellers are very sensitive to demand changes on a weekly basis. Scalpers, because of their access to these secondary markets, are able to discriminate based on income bracket and willingness to pay.
So why are the organizers of Lollapalooza not price discriminating? This may have to do with the fact that the event only comes around once a year and in order to effectively price discriminate they would have to have a sophisticated system in place to sense changes in demand over time and price accordingly. This may be prohibitively costly or might tarnish their reputation of providing affordable tickets and not price gouging. They also would have a very difficult time fulfilling the second condition of effective price discrimination, even if they were able to identify distinct market segments, how would they enforce the different prices paid by the various segments of the population? The line to enter the festival already took about 40 minutes, imagine the time it would take to ID everyone at the door to make sure the name on their ticket matched the name on their ID. This could be prohibitively costly for both the festival organizers and festival attendees.
I did eventually buy a ticket on StubHub and ended up having a wonderful time at the concert. When I was outside the festival venue I made sure to ask some of the scalpers I ran into on the street half way through one of the days of the festival how much their tickets were going for, less than 80% of the face value ticket price! I guess price elasticity of demand is relatively very inelastic half-way through a day of the concert because the scalpers didn’t want to be stuck with a bunch of worthless tickets the next day.