Creating a Futures Market for Major Event Tickets: Problems and Prospects

CREATING A FUTURES MARKET FOR MAJOR

EVENT TICKETS:PROBLEMS AND PROSPECTS

Stephen K. Happel and Marianne M. Jennings

In a 1995 article in this journal, we discussed the legal, economic,

and ethical concerns in trying to prevent “free-market” ticket scalp-

ing.

Since the time that article appeared, the Internet has become a

source of information as well as a business and contract formation

tool. Knowledge, products, and negotiations move in far more effi-

cient manners because of the facilitation of inexpensive communica-

tion and interaction via the Internet. Major event tickets—those that

attract national audiences such as the NFL’s Super Bowl, the PGA’s

Masters, the NCAA Final Four, or even a Bruce Springsteen con-

cert—are traded openly on eBay and other Websites.

Yet, despite the vast amount of personal wealth in the United

States and the relative ease with which consumers can travel to any

event site in the country, the availability of this new technology that

facilitates national and international exchanges of price information

and tickets has not created a nationally organized futures market for

major event tickets. This paper explores this “market failure” and

considers the likelihood of correcting it. The first section examines

the character of tickets, exploring their nature as call options. The

following section looks at the ticket resale statutes of 50 states along

with various municipal statutes and describes the current legal envi-

ronment surrounding ticket sales. The third section considers the

different distribution channels open to potential consumers of major

ticket events. The fourth section reviews recent microeconomic stud-

ies of event pricing and ticket scalping that have appeared since the

time of our previous article. The final section explores the reasons

served.

Stephen K. Happel is Professor of Economics and Marianne M. Jennings is Professor of

Legal and Ethical Studies at Arizona State University.

Various magazine and newspaper columnists have concurred. For instance, Seligman

(1999), in listing the 10 dumbest ideas of the 20th century, writes, “We are smart enough

to send men to the moon, yet we still have laws against ticket scalping.”

443

that the major entertainment event ticket market remains fragmented

and examines whether a nationally organized national market will

emerge in the near future.

Major Event Tickets as Call Options

For major events held in stadiums, arenas, amphitheaters, or con-

cert halls with limited seating capacity, tickets are normally put on

sale weeks or months in advance. They are initially sold at a printed

face value (plus, at times, an allowable service charge). The usual

explanation for a printed face value is a preassigned value for pur-

poses of possible refunds despite the reality that refunds from event

organizers are quite rare. In fact, event tickets often indicate on their

faces that (1) they are a revocable license; (2) admission may be

refused; (3) promoters and organizers are not responsible for lost

tickets; and (4) the stated face value may only be repaid under certain

conditions with some tickets actually having NO REFUND printed

on the front. Given the lack of administrative purpose, the real reason

for a printed face value is perhaps the same as the reason for placing

a par value on a common stock or option—the face value is simply a

starting point that provides a legal measure of what is “fair” or “eq-

uitable.”

Tickets to major events share other characteristics with call op-

tions. Because event sponsors do not typically require identification

to enter the event, the tickets become bearer instruments once they

are sold. Like a call option, the holder has the right, but not the

obligation, to occupy (or call in) a certain seat over a certain period of

time.

If tickets as traded today are essentially call options, then it would

follow that such bearer instruments of value could be exchanged, just

like stock options, in a nationally organized futures market. Likewise,

ticket markets could have standard rules of order and trading behav-

ior that are specified for licensed brokers. In such a market, the NFL

could, for example, take the seats designated for the “general public”

for the Super Bowl and have a public offering the day after this year’s

Super Bowl using the tools, access, and customers of the national

exchange. Bid/ask prices could be posted every trading day until the

following Super Bowl. As the game approaches and the two teams are

chosen, those fans entitled to team-based tickets could bring those

tickets into the market and also trade them openly on the national

exchange. A similar approach could be taken for NCAA Final Four

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tickets, major concert tours by high-demand artists, or for that matter

the Masters golf tournament.

The creation of such a market is, however, dependent on a number

of factors. First, the laws of each state must permit such sales and

resales of tickets. The patchwork quilt of regulations demonstrates

how difficult uniformity of approval for a national futures market

would be. Second, there is the possibility that the market dynamics

and value of major event tickets could change with the ease of access.

While the comparison to call options and the futures market is logical

and major event tickets meet the definition of bearer commodities in

a high-demand market, the actual market for tickets and ticket resales

has unique psychology and composition that can affect traditional

economic solutions with a free market.

U.S. Ticket-Scalping Statutes

There are no federal laws imposing national restrictions or rules on

ticket scalping. In 1998, Congressman Gary Ackerman (D-NY) tried

to introduce the Ticket Scalping Reduction Act, which, if passed,

would have prohibited the sale of five or more tickets in a single

transaction at a markup in excess of $5.00 or 10 percent of the printed

face value (whichever is greater). In a rare example of collective

economic intelligence on both sides of the congressional aisle, no

cosponsors came forward and hearings were never held on the Ack-

erman bill.

Presently, 20 states have no statutes regulating the resale of enter-

tainment tickets, 3 have only minor location restrictions, and 5 have

enabling statutes that confer regulatory authority over the issue to

local governments.

Within these so-called “open” states, major mu-

nicipalities including Anaheim, Ann Arbor, Cincinnati, Cleveland,

Dallas, Denver, Las Vegas, Madison, Milwaukee, Richmond, Roa-

noke, Seattle, and Virginia Beach have enacted ordinances restricting

the resale of tickets in some manner.

Strikingly, “the land of the free and the home of the brave” has 22

states that continue to adhere to legal price controls. Those price

controls take on various forms such as mandating allowable markups

on all entertainment tickets (12 states), outlawing scalping for par-

ticular events (8 states), or restricting profitable resale to a limited

In May, 2001, the Salt Lake Organizing Committee for the upcoming Olympic Winter

Games took the first positive step in this direction by conducting an Internet ticket auction

for the Winter Game’s most popular events such as figure skating, hockey, and ski jumping.

A listing of state statutes on ticket resale is available from the authors upon request.

CREATING A FUTURES MARKET FOR MAJOR EVENT TICKETS

445

segment or segments of the public, such as sales by licensed brokers

(2 states). New York State, the very epicenter of financial markets,

presently has one of the strictest anti-scalping regulatory schemes in

the country (New York has regulated resale prices of tickets since

1822). In 2001, New York made it illegal for any person, firm, or

corporation to resell a ticket for more than $5.00 or 20 percent above

face value, whichever is greater (from 1984 to 2001 the markup was

$5.00 or 10 percent, and prior to that, $2.00 a ticket). Resale of tickets

is prohibited within 1,000 feet of a place of entertainment having a

permanent seating capacity of 5,000 persons and ticket brokers must

be licensed. Lastly, the practice of “ice” (insider trading where box

office employees channel tickets to brokers and scalpers for a fee) was

changed from a misdemeanor to a felony in 2001.

These statutes will be revisited in June 2003, due to sunset provi-

sions. The attorney general of New York, Eliot L. Spitzer, indicated

in the New York Times that if the problem of brokers illegally ob-

taining large blocks of tickets could be eliminated, his office would

consider supporting the removal of price restrictions on ticket resales

and going to a free market (Tierney 2000: B1) Laissez-faire advocates

can only hope that New Yorkers finally see the light after 80 years of

price restrictions.

Our previous work differentiated “first-generation” scalping laws,

those representing the early wave of ticket regulation that attempted

to curb the relatively confined activities of on-site scalpers, from

“second-generation” laws, those that were part of the next wave of the

regulatory trends that recognized the segmented markets in second-

ary ticket sales. The second generation of anti-scalping statutes care-

fully segmented street scalpers from ticket agents/brokers. Many of

these “second-generation” laws remain in effect because of the sup-

port from the public on the emotional aspects of controlling what is

perceived to be pushy and price-gouging scalpers.

Throughout the past decade, the law review literature (e.g., Rabe

1991, Zankel 1992, Criscuolo 1995, Kandel and Block 1997, Gibbs

2000) has uniformly called for more extensive ticket market legisla-

tion to protect the public from extortion and control of the market by

sellers. Some of the specific problems cited with street scalping in-

clude: creation or aggravation of traffic congestion, drug dealing,

fraudulent sales of bogus tickets, and misrepresentation of seat loca-

tions. The articles also approach the issue from the egalitarian argu-

ment of ensuring public access to entertainment and sports events as

well as the generic arguments on public welfare. Uniformly, those

writing in the field support the rights of promoters, owners, and

artists to decide on both pricing and distribution mechanisms.

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There is little variation in the analysis from the perspective of legal

scholars: consumers of major event tickets are “innocents,” and bro-

kers and scalpers are “evil manipulators.” This perspective had been

carried through to the regulations, statutes, and ordinances of both

generations of laws. No state or local statutes impose fines or jail

sentences on the buyers of tickets, only on the sellers. Illinois even

provides a civil remedy for a ticket purchaser who purchases a ticket

at an “overcharge” price: “Whoever feels himself aggrieved or injured

by paying for such tickets in excess of the advertised price or printed

rate has a right to recover for each ticket for which an overcharge was

made contrary to the provisions for the act, a sum of $100.00.”

While the second generation laws and ordinances continued their

popularity in adoption and enforcement, there was one notable ex-

ception to heavy-handed regulatory controls of on-site ticket scalping

on event days. In 1995, the Phoenix City Council held open hearings

on the issue of on-site scalping to explore alternatives to regulation.

Following the hearings, the council passed an ordinance that herded

all street scalpers into one location in the city, an empty lot across

from the main entrance to the Phoenix Suns arena. Used first for the

NBA All-Star Game that year, under the terms of this ordinance,

anyone could sell tickets at any price within the designated location

with no license required.

The ordinance remains in effect because it addresses problems that

are the focus of the legal literature. Since those selling tickets are in

one location, street congestion caused by consumers searching for

tickets sellers is avoided, fans are not hassled on the way to the game,

and the area is easy to police. The Phoenix experiment also has shown

that long-standing street scalpers do not knowingly trade in counter-

feit or stolen tickets and report any such activity to the police. The

Phoenix free-market alternative not only created a competitive pric-

ing atmosphere, it overcame nuisance effects. It functioned well dur-

ing the 2001 World Series, with ticket buyers witnessing declining

prices as game times neared.

Consumers Acquiring Tickets and the Extent of the

Primary and Secondary Markets

For those who wish to attend a major entertainment event, a series

of options exist for acquiring tickets. One is to simply go to the official

(team) box office, stand in line, and then pay the printed face value

(plus taxes) for tickets. A slight modification of this option is available

CREATING A FUTURES MARKET FOR MAJOR EVENT TICKETS

447

when the “box office” allows phone-in or e-mail orders that are sub-

sequently picked up at the will-call window.

For some events (e.g., the Super Bowl or the NCAA Final Four) no

“box office” exists prior to the event. Instead, the general public plays

the odds by submitting names for the possible award of tickets. A

small number of names are randomly chosen and the winners are

permitted to buy tickets for such events at face value. A random

system is also used when local radio stations stage promotional give-

aways that offer consumers the opportunity to win tickets through a

game or drawing.

Another option for consumers is to purchase tickets from an offi-

cially designated ticket agent. The largest such ticket agent in the

United States is Ticketmaster, with Tickets.com a distant rival. Agents

sell tickets through retail outlets, by telephone, or through secure

online sites, adding a service fee (roughly $4.50 per ticket for an

inventory that carries an average ticket face value of $33.00) for their

role in matching consumers to events. According to the Kelsey Group

(1999), Ticketmaster represents 94 of the 118 professional teams in

baseball, basketball, football, and hockey, and has 4,300 exclusive

worldwide relationships with local event venues and promoters, while

Tickets.com claims 4,000 such relationships. Ticketmaster’s ticket

revenues in 1998 were $316 million ($70 million of which were online

sales), with Tickets.com’s revenues in 1998 being $29.8 million ($5.3

online sales). Ticketmaster Group accounted for 16 percent of all

tickets sold in 1998.

The forgoing options constitute the primary ticket market for sport-

ing and entertainment events. Using data from U.S. Statistical Ab-

stracts, Variety, Newsday, Amusement Business, Team Marketing Re-

port, and the League of American Theaters and Productions,

TicketAmerica (1998) derived an estimate of $7.2 billion spent

through primary ticket channels in 1997. The Kelsey Group (1999)

gives estimates and forecasts of total ticket sales from 1999 to 2004 as

$14.5 billion, $16.25 billion, $18.1 billion, $19.9 billion, $21.9 billion,

and $24.4 billion, respectively. LiquidSeats (2001) estimates the face

value of all tickets sold in the United States for live events and at-

tractions in 1999 to be $16.7 billion. In contrast, TickAuction.com

(2000) finds the primary ticket market to be over $41 billion in 2002,

and EventTixx finds the “Tier 1 Event Marketplace” (major league

The A-List music acts (e.g., Madonna, ‘NSync, the Backstreet Boys, and Aerosmith) are

increasingly selling concert tickets on the Web in advance—conducting presales—largely to

members of online fan clubs or subscribers to Internet-access services like MSN and

America Online (Peers and Mathews 2001).

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sports, college football and basketball, concerts, Broadway theater,

select golf and tennis tournaments, etc.) to have ticket sales in excess

of $60 billion in 2000. The disparity among the estimates is best

explained by the fact that they encompass different segments of the

entertainment industry. However, all the estimates establish that the

size of the primary ticket market is massive.

Because entertainment event tickets are sold in advance, a second-

ary (resale) market naturally develops. Sellers in this market include

relatives, friends, business acquaintances, travel agents, tour group

operators, concierges, auctioneers on the Internet, brokers, and scalp-

ers.

Estimates for the number of recognized U.S. ticket brokers range

from 800 (EventTixx 2000) to over 1,000 (LiquidSeats 2001). These

brokers typically serve only a single metropolitan area or geographic

area. The broker industry is highly fragmented, comprised primarily

of small businesses that, on average, have 10 to 15 employees and

annual sales revenues of $3 to 4 million. No single broker controls

more than 1 percent of the secondary market (EventTixx 2000). Tick-

ets are acquired through every legal means possible (standing in line,

hiring others to stand in line, staging mass telephone calls and e-mails

for soliciting tickets, making special arrangements with season ticket

holders or players and artists, infiltrating fan clubs, and trading with

other brokers). Some 25 to 40 percent of all broker ticket sales involve

“try and get” tickets, advance sales not in current inventory that must

be secured (often from other brokers). Approximately 50 percent of

all brokers have a Web site and 95 percent of them default to a model

that has them advertising tickets on a “by-area” basis for specific

events.

TicketAmerica (1998), using its primary market estimate of $7.2

billion for 1997, assumes that brokers resell 10 percent of the primary

market and double their prices, which leads to an estimate of $1.4

billion for the secondary broker market. Similarly, EventTixx (2000)

believes that brokers currently have a $2 to 3 billion slice of the $60

billion “Tier 1 Event Marketplace.” However, LiquidSeats (2001),

using a larger estimate of the primary market and assuming that

brokers resell some 20 to 30 percent of the top-tiered seats and then

employ a 50 percent mark-up, estimates the secondary market to be

in the $10–14 billion range in 2000.

Because the ticket broker market is not an integrated one,

TicketAmerica attempted to fill the void in 1998 by undertaking ef-

forts to organize brokers into a national exchange. Founded by indi-

viduals with extensive experience in both business-to-business and

retail electronic transaction processing and the ticket brokerage in-

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449

dustry itself, TicketAmerica worked with trade groups like the East

Coast Ticket Brokers Association and the National Association of

Ticket Brokers to link brokers around the country in the “first verti-

cally integrated portal for reselling premium tickets for high demand

sports and entertainment events.” TicketAmerica’s goal was to be the

primary Internet retailer, making an inventory of the best seats avail-

able to the general public at the click of a mouse. In addition,

TicketAmerica hoped to be the first Application Service Provider for

the ticket broker community, offering the independent ticket brokers

a fully integrated e-business solution site. Yet even though “few bro-

kers have the infrastructure necessary to efficiently run their own

business and none have the ability to make the infrastructure invest-

ment required to “organize” the market,” TicketAmerica did not suc-

ceed.

The same is true for TickAuction.com, another venture to

create a broker-to-broker network in the late 1990s. Trying to organize

the fiercely independent group of ticket brokers is like herding cats.

The secondary market also has offered the Internet as a direct

option for consumers. The overwhelming consensus among those

analyzing and consulting for the event ticket market is that online

sales will continue to skyrocket. EventTixx (2000) reports that the

number of Ticketmaster tickets sold on the Web relative to traditional

retail and telesales channels had grown from less than .1 percent in

1996 to 24.8 percent by the 2nd quarter of 2000; and Ticketmaster

now faces increasing competition from niche players, such as Cul-

ture.Finder.com, that sell tickets online for smaller events. The Kel-

sey Group (1999) projects that the share of total U.S. ticket sales

revenues that occur online will increase from 2 percent in 1999 to

17.5 percent in 2004. LiquidSeats (2001) anticipates that online sales

of event tickets will grow at a 58 percent compound annual growth

through 2006.

While 50 percent of ticket brokers in the secondary market have

Web sites offering seats, few are doing significant ticket sales via

e-commerce. In aggregate, LiquidSeats (2001) estimates that the In-

ternet accounted for less than 4 percent of secondary market sales in

2000. Buyers in the secondary market are not going to brokers online.

Instead, they are heading to auction sites.

Local newspaper, radio, and television station Web sites provide

ticket buyers and sellers direct access to trade through an auction

format. Tickets.com and OpenSeats.com, attempting to be full service

providers, provide auction service as well. eBay has recently expanded

its offerings to include major event tickets. While event ticket busi-

Quotes are from TicketAmerica’s prospectus.

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ness remains a small percentage of total auction sales, its sports-

tickets auctions grew 200 percent from July 2000 to March 2001

(Walker 2001). Accordingly, the company is anticipating very strong

growth over the coming decade.

The secondary Internet market underwent radical change starting

in 1999. Firms with highly refined software packages approached

major sports teams and event promoters with an offer to resell (sea-

son) tickets at designated Web sites. In exchange, the owners or

promoters would receive a set fee. While SeasonTickets.com and

LiquidSeats were in business before June 2000, what captured na-

tional attention was the San Francisco Giants Double Play Ticket

Window rolled out that month (Sports Illustrated 2000).

The way it works is that a season ticket holder logs onto the official

Giants Web site and sets a fixed price for excess seats (here the price

had to be above face value because the Giants did not want to alienate

other season ticket holders by underselling tickets). After fans buy the

tickets, they are picked up at the will-call window at the stadium,

thereby avoiding delivery and counterfeit problems. The Giants,

through their licensed agent, receive a fee of 10 percent from both

the seller and the buyer, getting revenues that would otherwise go to

brokers and scalpers.

SeasonTickets.com, currently the biggest player in this type of trad-

ing, and LiquidSeats operate in a similar fashion with their clients, the

only difference being that their Web site prices are not necessarily set

above face value. TicketMaster entered this market in January 2002

and expects significant revenues through strategic partnerships.

Going a step further is Global eTicket Exchange. GEE proposes to

conduct IPO-like auctions for tickets in the primary market rather

than selling tickets at face value. All tickets are electronic, whereby

the buyer uses a special device (e.g., a smart card) to enter the event,

so tickets are no longer general bearer instruments that can be readily

traded after the initial purchase. Instead, if the buyer wants to resell

the ticket, it must be done through GEE’s secondary market Web

site, thus pushing aside brokers and scalpers. GEE also proposes to

increase concession and team-shop sales by providing detailed spend-

ing profiles of its ticket buyers and formulating integrated pricing

strategies and promotions. At the time this article was written, GEE

had not raised the requisite capital for startup, but it had submitted

six business pricing processes to the U.S. Patent Office.

Finally, for those buyers who do not have the need to purchase

tickets days, weeks, or months in advance, or who decide at the last

minute to attend, there is the original secondary market of street

scalpers who operate near the stadium or concert hall on event day.

CREATING A FUTURES MARKET FOR MAJOR EVENT TICKETS

451

Without this secondary market timed to coincide with the event,

consumer options will remain restricted. The market for these types

of events does not deepen until just before the event, and on-site

trading facilitates clearing of the market at its peak.

Pricing Issues

A distinguishing characteristic of the major entertainment industry

until recently has been a lack of extensive price discrimination. While

symphony and opera houses often have 25 or more different ticket

prices depending upon seat location and quality of the event, major

rock concerts may have only two or three ticket prices. Indeed, when

the Rolling Stones tour the United States, the same printed face value

is charged in all venues for all seats. Similarly, major sports leagues

have rules that for a given seat, the same price (printed face value) is

normally charged for each game over the season regardless of the

quality of the opponent. Four microeconomic explanations are pos-

sible for the lack of price discrimination at major events.

The first explanation is that symphony and opera producers under-

stand the preferences and economic characteristics of their fan bases

far more completely than major league sports teams or national per-

formance artists whose fan base consists of thousands of potential fans

who span all socioeconomic groups. Symphony and opera producers

are able to capitalize on well-recognized differing elasticities of de-

mand for alternative seat locations in their venues.

A second explanation for the lack of price discrimination is the

possibility that for events like the Super Bowl or Bruce Springsteen

concerts, most potential attendees place a much greater value on

getting into the event than on occupying a particular seat. Tickets for

these concerts are perceived to be relatively homogeneous goods by

much of the concert-buying public. In opera, seeing the emotion on

the face of a singer may be important and a seat that permits that

close examination is worth more. At football games and rock concerts,

large screens visible from all seats in the arena permit such close

examination. Further, the magnitude of the sound experience may

make a seat’s location irrelevant. The same cannot be said about the

experience of hearing a tenor or soprano. Sensory differences, differ-

ences among customer bases, and the nature of these events preclude

extensive price discrimination.

A third explanation is that complementary concession sales at the

event are much more lucrative for major sporting events and concerts

than for symphonies and operas. General admission seats are priced

uniformly low as a loss leader in order to attract a sell-out crowd that

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will produce concession revenue that the promoter is able to predict

with accuracy in advance of pricing tickets for the concerts. The large

sums expended by attendees at the concession stands are character-

istic of sporting and concert events, but not operas.

A final explanation is that certain artists such as U-2, Pearl Jam, and

Garth Brooks assuage their fan bases with the notion of charging a

“fair” price for their concert tickets. Billy Joel and Bruce Springsteen

have stated that they keep their ticket prices low because their “true

fans” are important to them. Such pricing stances are an attraction to

an event in and of itself; indeed, dedication to low ticket prices com-

pletes the aura of “blue collar” some of these artists have cultivated.

If such artists scale the house, they risk creating a public perception

as price gougers, thereby hurting their reputations and long-run box

office sales.

Regardless of the specific explanations for not scaling the house in

the past, the primary market appears poised to make a sharp change.

The slowing economy, increased competition for the public’s enter-

tainment dollar, and better information will allow promoters to en-

gage in a more cautious but thorough form of price discrimination.

In recent microeconomic literature on pricing, Steven Landsburg’s

1993 insightful piece, “Why Popcorn Costs More at the Movies and

Why the Obvious Answer Is Wrong”, has important implications for

sports owners, artists, and promoters. Landsburg’s fundamental

theme is that owners and promoters are selling a package that en-

compasses the ticket to enter and the complementary purchases that

take place at the movie.

Suppose consumers, broadly speaking, have some total amount in

mind that they are willing to pay for the package deal of ticket and

complementary items. Profit-maximizing sellers are going to think

first about attracting those consumers who are willing to pay the most

for the overall package. Promoters and producers are going to try to

discover the prices different customers will pay.

When a consumer chooses to watch a movie and buy a box of

popcorn, assume that he or she is indifferent to paying $7 for the

admission ticket and $1 for the popcorn or $5 for the ticket and $3 for

the popcorn. While the consumer may be indifferent, the seller or

theater owner is not. The cheap popcorn attracts popcorn lovers and

makes them pay a higher price at the door. But to take advantage of

this, movie prices may become so high they drive away nonsnackers

who come only to see the movie.

In contrast, expensive ($3) popcorn allows sellers to extract differ-

ent total sums from different customers. Popcorn lovers, by having

more fun at the movies, are ultimately charged more in total than

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453

nonsnackers. Indeed, as Landsburg notes, “expensive popcorn makes

sense only if popcorn lovers are really willing to pay more than other

people for their evenings at the theater.”

Extending the argument to major entertainment events, those con-

sumers sitting in particularly good seats may appear to be buying the

seats at a price below market value, but they spend so much on

concessions that total profits are maximized. Relative ticket prices do

not decline markedly for the lower quality seats because the pure

watchers (nonsnackers) are attracted to the event. For the very worst

seats, those that would often go unused at “standard” prices, sellers

may practically give them away as part of a marketing tool because

some of the consumers of lower quality seats will purchase the rela-

tively expensive snacks. Owners and promoters who have achieved a

delicate balance between ticket prices and concession prices across

groups with different elasticities are loathe to make any changes that

upset their complex pricing equilibrium.

In 1994, DeSerpa took the property rights of ticket holders explic-

itly into account in examining the pricing decisions by sellers, the

nature and extent of product differentiation, and the relative impor-

tance of audience participation in major events. For professional

sports leagues, he found that team anticipation of a high number of

sellouts, combined with unexplained variance in the markets of spe-

cific games, gives rise to a relatively simple solution to promote season

ticket sales and a strong secondary market. Assuming a perfect resale

market, the rational seller can apply the same pricing structure to all

games: relatively low-demand games will be overpriced and relatively

high-demand ones will be underpriced.

However, in the absence of a strong resale market (due to anti-

scalping legislation), teams may attempt to anticipate price fluctua-

tions and charge different prices for each game. Even if such a pricing

approach were feasible and inexpensive, adverse fan reaction would

likely make the gains small compared to uniform pricing. If sellers

instead try to maximize expected revenue relative to a uniform price

constraint, season tickets must be discounted because those unable to

attend would, at best, recoup what they paid and, at worst, be left with

an unused ticket for the events they cannot attend.

For the playoffs, sellers do not “exploit” their season ticket holders

by charging very high market-clearing prices because, if they did, they

would sell far fewer season tickets thereafter. Season-ticket priority

rights would become worthless. As DeSerpa (1994: 513) notes, “If the

seller does not charge the static monopoly price and buyers ‘knew’ (or

expected) that he would not, the playoff ‘windfall’ is already internal-

ized into the price of the season ticket.”

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Turning to concert tickets, DeSerpa (1994: 515) points out that

one-time concerts are the archetype “mob good” wherein audience

reactions and participation are consumed jointly with the perfor-

mance itself. He argues that the appropriate theoretical analogy is the

set of externalities created by a club in which individual members

consume the characteristics of other members. Sellers can put a price

tag on one part of the transaction, but not on the other. Thus, highest-

demand buyers in terms of money price are not typically the “best

audience,” and the result of excess demand is a change in the ex-

pected audience reaction (the noise level) by expanding the “popu-

lation” from which the actual audience is drawn. By allowing rela-

tively low-demand, raucous buyers a chance of admission, demand

prices increase for all potential buyers, with the maximum price re-

flecting a balance of “the various continuums of economic forces”

(DeSerpa 1994: 517).

The econometric work by Williams (1994) on the economic impact

of anti–ticket scalping laws on ticket prices across the National Foot-

ball League (NFL) is also instructive in understanding event pricing.

Individual teams price their tickets according to competition (what

other entertainment events in the area and other NFL teams are

charging combined with what is perceived to be the entertainment

value of the players being fielded).

The dependent variable in the NFL ticket-pricing equation is the

average 1992 season ticket price for each NFL team. Concession-

pricing issues are ignored. The independent variables in the regres-

sion equation include team-specific variables (average player salary,

team quality as measured by recent conference standings and Super

Bowl performances, stadium capacity) and economic variables (popu-

lation of a team’s market, per capita income in the market, whether

two NFL teams play in the same market). Dummy variables are used

to divide the sample into cities with relatively vigorous anti-scalping

laws and those with relatively weak or nonexistent laws.

Anti-scalping laws are found to affect pricing. When fans can freely

and easily resell their tickets, NFL teams charge higher prices.

Williams’ explanation for this finding is that legal scalping pro-

vides the team whose tickets are resold an active secondary market

with better information about market-clearing prices. Indeed, the

secondary market in those team locations provides a dollar measure

for the magnitude of underpricing. Looking strictly at cross-sectional

season ticket prices, Williams concludes that if NFL owners followed

their economic self-interests, they would vigorously oppose any laws

that prevented or interfered with the scalping of tickets above face

value.

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455

Marburger (1997), like Landsburg, starts with concessions as

complementary products to the actual product of performance goods

like movies or sporting events. Because the number of available seats

is fixed, the variable costs associated with the number of tickets are

assumed to be virtually nil. These factors suggest a standard model of

rent in which the profit-maximizing price is the revenue-maximizing

price at unitary elasticity. However, because a ticket buyer gains

access to both the performance and the concessions, tickets are

priced below unitary elasticity in the inelastic region to increase the

number of concession patrons. This conclusion provides a theoretical

foundation for empirical studies in the 1970s, 80s, and 90s cited by

Marburger that produce point elasticity estimates in the inelastic

range.

Rosen and Rosenfield (1997) use the theory of classes-of-service

price discrimination to analyze some commonly observed practices of

ticket sellers under conditions of deterministic demand. Their work

illustrates how catering to any subset of customer tastes in one class

constrains the revenues that can be extracted from groups in other

classes. While discriminatory price differentials separate buyers into

somewhat homogeneous groups, substitution opportunities in other

classes invariably limit the surplus that can be extracted from them.

The model employed assumes sellers offer two kinds of seats, high-

quality and low-quality, and then subsequently choose the number of

seats, the quality of each class, a pricing policy for complementary

goods sold on the promises to ticket holders, along with the prices of

tickets themselves. All customers prefer the high-quality seats, but

their willingness to pay varies. Sellers know the frequency of demand

prices distributed over the population but cannot identify the specific

tastes of individual buyers. They also know how the reservation-price

distribution changes as seat quality and the prices of complementary

goods vary. Finally, sellers are assumed to be extremely selfish and do

not wish to allow others to gain financially from the resale of tickets,

thereby precluding secondary markets.

The pricing problem in this model is solved in two steps. First,

given the quantities and qualities of the two seat classes and the price

of complements, sellers choose ticket prices to maximize revenue.

Second, given the optimal pricing policy, sellers decide on the quan-

tity and quality of seats and on the price of complements. The con-

clusion is that the joint distribution of reservation prices for different

quality categories is an important determinant of an optimal price

schedule.

For example, discrimination is greater in high-quality than low-

quality categories when the marginal variance of demand prices is

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456

greater for the high-quality category. Similarly, theater-size con-

straints require repeated production, a kind of “batch processing” of

audiences of given size until all demand is served. Class of service

broadly corresponds to rank in the intertemporal queue: attending

earlier performances is high quality and later performances is low

quality. Prices decline over time to sort customers by tastes, with

sellers finding more ardent customers buying earlier if prices are

declining slowly enough to keep them from waiting but quickly

enough to kept ardent buyers from purchasing too early. In a sense,

customers with the most intense preferences for the service are the

most “exploited,” as measured by price-cost margins. Ticket prices are

lowered and complement prices are set above marginal costs when

the average customer buys more complements than the marginal

customer.

Leslie (1999), relying upon the Broadway play Seven Guitars, for-

mulates a model that includes both second- and third-degree price

discrimination to analyze the welfare implications of such behavior.

The marginal cost of every ticket sold for a given performance is

assumed to be effectively zero, and capacity constraints are not a

binding issue. The goal of the firm is simply then to maximize rev-

enues from ticket sales. Moreover, because there are no subscrip-

tions, concerns about ticket bundling for series of different shows are

precluded.

Distinctions are made between full-price sales (those for a specific

area of seating ranging from orchestra to standing room) and discount

sales (those available only to individuals receiving coupons in the mail

or at given restaurant locations) that result in relatively high-quality

seats being purchased. Consumers must physically present them-

selves on the day of the performance at the discount booth to obtain

a discount ticket, and the number of such tickets made available at the

booth varies day by day and is inversely related to the demand for

tickets in the other categories.

Among Leslie’s findings, the observed price discriminations may

improve the firm’s profit by approximately 5 percent compared to

uniform pricing, while the difference for aggregate consumer welfare

is negligible. Also, the gain from price discrimination depends sig-

nificantly on the magnitude of the discount offered at the booth on

the day of the performance. And in the face of capacity constraints for

each of the different seat-quality regions within the theater, high

demand for some performances implies rationing that leads certain

consumers to purchase their second (or worst) preferred ticket option.

Swofford (1999) begins by citing McCloskey (1985) as the typical

textbook analysis of ticket scalping, whereby scalpers reallocate tick-

CREATING A FUTURES MARKET FOR MAJOR EVENT TICKETS

457

ets that owners and promoters planned to sell on a first-come-first-

served basis at set prices to those who are most willing to pay for

them. Even if ticket scalpers are able to perfectly price discriminate,

no one pays more for a ticket than their reservation price. Allocative

efficiency is thus enhanced, but consumer surplus is reduced and, in

the limit, eliminated.

Swofford then turns to the issue of why a profit-maximizing firm

would allow the purchase of its product (tickets) for speculation and

arbitrage. At least three explanations are possible. One is that uncer-

tainty and risk on the part of primary sellers provides opportunity for

speculation and less risk-adverse brokers. For example, the producer

of a new play sells many seats to early performances to brokers and

scalpers (serving as underwriters) to cover costs in case the show

opens to less-than-stellar reviews.

A second reason is that primary sellers’ producing costs may be

driven up substantially if they try to prevent the secondary market.

The ticket scalper is more an arbitrager than a speculator in this case.

The scalper is able to arbitrage because of lower information costs,

lower transaction costs, or lower taxes. Local scalpers may simply

know more about the local market for a concert than performers or

their agents.

A third reason is that revenue functions are different. The ticket

scalper may be a superior price discriminator when compared to the

primary seller. In addition, the primary seller may be more identified

with the product than the scalper. The scalper examines static profits

while the primary seller looks at dynamic profits. The present value of

long-run profits from repeat business in different shows may be

greater than the static gain from higher revenues on a particular show.

Courty (2000) provides an extensive overview of ticket pricing in

the entertainment industry over the past several decades. He con-

cludes that existing microeconomic theory has been successful in

explaining price variations observed in ticket markets. At the same

time, prices do not vary as much as researchers would predict under

either a competitive or monopoly assumption.

A Nationally Organized Futures Market?

Extensive wealth and relative ease of travel in the United States

have created a national market for major sporting and entertainment

events. Given the advances in information technology and the nature

of tickets, some format analogous to the Chicago Board of Options

seems logical for the secondary ticket market. Yet no such market has

evolved. The question is why.

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458

Technical reasons may provide a partial explanation. For extensive

futures trading, products must be homogeneous, but tickets to most

major events may not be perceived as such. Another explanation is

that the market is not “deep” enough because very few tickets will

actually be traded on a day-to-day basis. More decisive is the wide-

spread opposition by many sellers of tickets. While extensive second-

ary markets help owners and promoters by providing greater infor-

mation on seat prices, concession sales are stripped away from the

entertainment package. The delicate pricing balance that owners and

promoters seek to achieve between ticket price and anticipated

complementary sales is upset. In addition, owners and promoters may

be loathe to allow others to make any profits in which they have no share.

Many small ticket brokers and street scalpers are opposed to a

nationally organized market as well. Such a market would mean that

local customers are no longer highly dependent on them to secure

good seats for special events. In fact, the general trend does not look

promising for small, highly localized sellers, except perhaps on event

day, even if a nationally organized market does not arise. Online

trading, where secondary sellers and buyers can interact directly, is a

powerful and growing force that reduces the need for the small bro-

ker to serve as a middleman in the advance market.

Finally, there is the general public’s opposition to highly organized,

day-to-day futures trading. Current distribution schemes of the NFL

for the Super Bowl, the NCAA for the Final Four, and the Masters

Golf Tournament do allow an average person to get into those events

occasionally without having great wealth or knowing the right people.

Such attendance may become a watershed moment in a person’s life.

A nationally organized market, rightly or wrongly, is perceived to

create a ticket market in which those who can afford to pay end up

with all the seats. Cries of price gouging become the passionate con-

cern for those who want fair prices and access.

A secondary market may disturb the psychological factors in major

event attendance. A secondary market changes the delicate pricing

mechanism arrived at by event promoters and team owners. The

partnership format appears to satisfy the primary market sellers while

not alienating the potential customers in the secondary market with

perceptions of price gouging. As this market format takes hold, ever

more complicated pricing models lie in wait for the microeconomic

literature as complementary and intertemporal factors are weighed

both directly and in relation to hedging opportunities by various busi-

ness concerns.

Given present technological and market constraints, there are sev-

eral paths the development of a secondary market could take. One

CREATING A FUTURES MARKET FOR MAJOR EVENT TICKETS

459

path is that a technologically savvy company captures much of the

secondary market and offers a national mechanism whereby sellers

and buyers can use a service for ticket sales and purchases. However,

such an approach would require that any company providing the

market would hold a substantial number of tickets for a variety of

events, including sports, concerts, and other one-time events.

Another possibility is that ticket sellers could create a nonbearer

ticket instrument, akin to airline e-tickets, a type of instrument that

could be traded only through the promoter’s organization or Web

site. Such an approach would permit the owners and promoters to

capture the secondary market because of the inability of secondary

market participants to overcome the nonbearer quality of the tickets.

Owners and promoters would enjoy the benefits of the secondary

market sales and the distinction between the primary and secondary

markets could disappear.

The creation of an ideal futures market for tickets would be one

operated in a technologically advanced fashion that provides full ac-

cess to tickets and prices as well as open access for all buyers and

sellers, including event promoters and team owners. Such an open

market would require bearer types of instruments because the use of

e-tickets by the promoters and owners would create the secondary

market usurpation noted earlier. Additionally, the on-site trading re-

mains a critical part of the ideal futures market because the nature of

these events and buyer psychology is such that the market does not

fully deepen until the event is imminent. The ultimate decision to

attend an event occurs at varying times during the event and ticket

cycle, but the full market effect is not captured unless those final

hours and moments of trading are also captured.

One of the possible results of such a market is the potential for

hedging among promoters and owners, particularly with sports. Own-

ers could hedge some of the risk associated with season failures that

could come from terrorist types of attacks, weather, and other force

majeure events that could delay, interrupt, or shorten the season in

one sport.

It is impossible to predict the reaction of the public to such selling

approaches. The psychological factor remains a wild card in the evo-

lution of the secondary market, and its success is dependent upon

consumer comfort with and acceptance of such a market.

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