Business

Hey, Miley Cyrus...wanna make more money?

Why performers should have ticket auctions

By Suzanne McGee     

From: Magazine

Event promoters have long been plagued by speculators who, thanks to low face values of tickets and high demand to see shows, capture millions of dollars in revenues that might have gone to the performers or the venue. Chicago Booth research suggests it doesn’t have to be this way.

Ticket speculators have been around for centuries. Many fans of Charles Dickens, who wanted to listen to him read from A Christmas Carol at Steinway Hall in New York back in 1868, had to deal with intermediaries who snapped up tickets with the goal of reselling them at a hefty markup. Tickets to hear Dickens read were priced at $2 apiece, sold out in half a day, and then were resold for $20 and up on the secondary market by what a New York Times editorial described as “gangs of hardened ticket speculators.” 

Technology has made such market distortions more pronounced, according to Eric Budish, associate professor at Chicago Booth and Aditya Bhave, a PhD student at the University of Chicago. For instance, during a tour by pop star Miley Cyrus in 2007 and 2008, speculators snapped up tickets with a face value of about $64—these sold out in only 12 minutes—and sold them on eBay and other auction sites for as much as $2,000 each. Secondary-market ticket sales generate US revenues of $4 billion annually, according to a Ticketmaster estimate and a Forrester Research report. 

A natural question, at least to an economist, is, why don’t primary-market vendors use auctions? The basic goal of an auction is to discover the market-clearing price for hard-to-price goods, such as Charles Dickens or Hannah Montana tickets. Relative to fixed prices, auctions should discover more accurate prices, increase revenues for the artist, and reduce the profits left over for speculators. 

Ticketmaster face value and auction prices chartsIn 2003, Ticketmaster, the largest ticket distributor in the United States, decided to do just this, introducing primary-market auctions as an option for its clients. Bhave and Budish set out to see whether the auctions worked. 

The researchers study auctions conducted by Ticketmaster for 22 concert tours in 2007 and 2008. They look at the price paid for a ticket in the primary-market auction, and compare it to what the ticket subsequently turned out to be worth on eBay, the largest secondary market. The authors conclude that the auctions do a remarkably good job of nailing the ticket’s secondary market resale value. That is, the auctions find the price that balances ticket supply and fans’ demand. 

The researchers sum up the results in two graphs. (See graphic, “Cutting out the middleman,” above.) They show that when performers set face values for tickets (in consultation with Ticketmaster), they usually charge far less than the tickets are really worth, as measured by their eBay value. However when performers sell their tickets via an auction, they on average charge the correct price. This translates to more money for the performers. In the researchers’ dataset, the average revenues a performer earned from Ticketmaster-auctioned tickets nearly doubled to $16.9 million, from the $8.5 million they might have earned selling tickets at face value.  

This also translates to less money for ticket speculators. If the artists sold their tickets at face value, ticket speculators would have earned an average of $135.85 per ticket from buying at face value and reselling on eBay. The auctions left just $6.07 on the table, less money for ticket speculators.

Works cited

Aditya Bhave and Eric Budish, “Primary-Market Auctions for Event Tickets: Eliminating the Rents of ‘Bob the Broker,’” Working paper, July 2013.