March 20, 2023
Market design and live events
Eric Budish discusses the introduction of auctions to the primary market for tickets.
Fans have frequently experienced the frustration of event tickets selling out in a matter of minutes and then being resold for twice as much or more. This combination of underpriced tickets in the primary market and rent-seeking speculation in the secondary market has long puzzled economists.
In a paper in the American Economic Journal: Microeconomics, authors Eric Budish and Aditya Bhave show that auctions are an easy way to fix broken ticket markets by looking at changes Ticketmaster made in 2003.
However, the benefits of using auctions in primary markets are unlikely to be felt by consumers. Budish says that other reforms, such as preventing resales, could be a way for artists and sports teams to reward their die-hard followers.
Budish recently spoke with Tyler Smith about Ticketmaster’s efforts to curb secondary markets with auctions, and how reforming the primary market for tickets benefits sellers as well as society.
The edited highlights of that conversation are below, and the full interview can be heard using the podcast player.
Tyler Smith: Economists often say that tickets for live events are underpriced. Can you explain why that puzzles economists?
Eric Budish: I think the first thing to notice about tickets is, just like you said, they're often quite obviously underpriced. And the evidence that they’re underpriced is that they immediately sell out and then have a secondary market value—that is a resale value—significantly larger than the initial price on the primary market. Economists view that as a puzzle because the seller of the tickets is leaving a lot of money on the table. If a ticket has a face value of $50, but a secondary market value of $200, there's $150 of value that the seller of the ticket isn't capturing. It will instead often flow to ticket resellers.
But part of what's so special about the tickets market relative to some other economics markets is that there is an emotional bond and a long-run relationship between artist and fan or between sports team and fan. There have been efforts over the years to rationalize why an artist or a sports team might genuinely wish in their own view of their self-interest to sell a ticket to their concert or their sporting event at a “below-market price.” There have been several rationalizations of that desire, and I think they're all kind of plausible. What's bizarre and harder to explain is the combination of setting a below-market price, but also enabling a super active speculative frenzy around obtaining the underpriced tickets because then the rents—the difference between the the $200 resale value and the $50 primary market price—don't accrue to a fan. They instead accrue to whatever ticket reseller was fast enough to scoop up the underpriced tickets and then resell them at a profit.
Smith: These speculators have only gotten better since the rise of the internet at getting between performers and their fans. Can you elaborate on how the internet has made some of these problems worse?
Budish: I think there was an old equilibrium, and it's old in the sense that it describes the ticket market probably for the whole 20th century. In this pre-internet equilibrium, tickets were often underpriced and often sold out quite quickly. Many tickets were purchased by speculative resellers, but the large majority of tickets were purchased by ordinary fans. The best numbers come from a great research paper by Phil Leslie and Alan Sorensen. They estimate that in the pre-internet era of the ticket market, it may have been about 5 percent of tickets that went through the secondary market. The internet really transformed the tickets market starting in the first decade of the 21st century. The internet changed the technology of both the primary market and the secondary market.
The internet technology made it a lot easier to amass large numbers of tickets for events all across the country, really all across the world. There were economies of scale in the amassing of large quantities of tickets, whereas in the good old days ticket resellers had to stand in line. But there is just a lack of scale economies to that. Whereas if you can use an algorithm to scoop up underpriced tickets in the primary market, you can do it at substantial scale. The resale of tickets also changed with the internet because now most of the secondary market goes through internet platforms like StubHub and SeatGeek and TickPick. The secondary market with the rise of the internet is also a lot easier to use.
I think that there was this kind of uncomfortable tension in the pre-internet era when it was a little weird that artists were often pricing their tickets significantly below the market-clearing price. But you can kind of make up stories for why it might be in an artist's long-run interest to do that. Most of the value from the underpricing is at least accruing to the intended recipients of the underpricing, i.e., to the fans. But the internet kind of broke all that with the rise of algorithms—bots as they are sometimes described—in the ticket market. And in a very low friction, globalized resale market, a lot more of the rents are just accruing to brokers. Ticketmaster estimated that it’s 20 percent. They've described to me in a meeting that in the right tail, in some events, it might be as much as 90 percent.
Smith: Can you dig into the changes that Ticketmaster made in 2003 and what kind of information you are able to collect?
Budish: Let me step back a tiny bit. As an economist, I think the first instinct for how you solve this problem of a change in technology creating a burst of rent-seeking and then overwhelming a bad market design is to change the market design in a way that yields a market-clearing price. Instead of competing on speed to scoop up the underpriced tickets and then resell them at the market-clearing price, they should just be sold at the market-clearing price in the first place. That's more efficient. It generates more revenue; it creates less rent-seeking. What Ticketmaster introduced in the early 2000s were auctions for the highest quality tickets to a particular event. But it was the artists' choice to use them.
Ticketmaster designed a pretty sensible auction design that enabled customers to bid for high-quality tickets to events. I was able to get data from Ticketmaster on bids and outcomes in these primary market auctions, and I was able to scrape data from eBay on the secondary market resale value of very similar tickets. You can see clear as day that the auction worked in the sense of eliminating the discrepancy between the market value of the asset and the price of the asset, which is kind of what auctions are supposed to do. They're supposed to discover the market-clearing price.
You can see clear as day that the auction worked in the sense of eliminating the discrepancy between the market value of the asset and the price of the asset, which is kind of what auctions are supposed to do. They're supposed to discover the market-clearing price.
Smith: Would you say this was an unambiguous win for consumers or were some consumers hurt?
Budish: It's not an unambiguous win. I think that's part of the complexity and part of why the auctions have been discontinued. Let's go back to my example where the face value was $50, but the resale value was $200. The fan who would have gotten lucky and gotten a ticket at $50 is mad at the auction because now the tickets are getting priced at the market-clearing price of $200. That fan is worse off. The fan who would have bought on the secondary market may be a little better off because they could buy it directly and not have to pay as many fees. The real gains are to the sellers of the tickets, who are getting the full 200 bucks, not the $50. And the other gain is a social gain. There's a lot less wasteful rent-seeking—a lot fewer “Bob the Brokers” devoting time, energy, and wasted resources to trying to win an industrial arms race to pick up underpriced tickets.
Smith: In an ideal world, what would you like to see happen to these ticket sale markets?
Budish: In an ideal world, I think there's essentially two economically logical ways to sell tickets. One is to sell tickets at a market-clearing price. The auctions were an effort to do that. The other way to do it is to set a below market-clearing price, but turn off the rent-seeking. The way to do that is essentially to put names on tickets, which makes tickets nontransferable or harder to transfer—in the same way that if I buy an airline ticket and my plans change, I can't resell that ticket on eBay or StubHub. One of the policy goals ought to be if artists want to sell their tickets at a market-clearing price, great. That's sort of standard Econ 101. And that's already quite feasible with the current market structure. I think the other thing that policy might have a role in facilitating is enabling artists to have a sincere option to set a below-market price and turn off the resale market if they want. There have been some efforts. In the United States the euphemism is “paperless ticketing.”
“Primary-Market Auctions for Event Tickets: Eliminating the Rents of "Bob the Broker"?” appears in the February 2023 issue of the American Economic Journal: Microeconomics. Music in the audio is by Podington Bear.