Should a Gold Medal be Awarded in Ticket Scalping?

It’s pretty exciting to watch Michael Phelps, Katie Ledecky, or Usain Bolt race their way to victory on TV each night during the Olympic Games. Think of how much more exciting it would be to witness the experience live in Rio, with the crowd surrounding you jumping and chanting and cheering with every kick, stroke, or step! As with pretty much everything in life, there are some people who would find this experience to be much more valuable than others… and they would be willing to pay for it!

The problem is, there is a very limited number of seats in each venue, so not everyone can get a ticket that wants one. The question then becomes, how should the tickets be distributed in order to maximize total welfare? If we take the Coase Theorem at face value, then it really shouldn’t matter who gets the tickets initially, as they will always end up with those who value them most. The process of reselling tickets in a secondary market is called "scalping." In fact, when people engage in this trade, surplus is created and society overall is better off. The conclusion that these trades will take place, however, relies on one particular assumption which is not always valid in this circumstance: the assumption that transactions costs are low.

Let’s assume, for example, that the Olympic Committee is in charge of the initial distribution of all 100 tickets to the Men’s 100m final race that Usain Bolt is sure to dominate. They don’t want the world to tune in and see empty seats in the stadium, so they are sure to set the price for tickets low enough to ensure a sold-out stadium. We can assume that the charge the minimum price that they need to receive in order to not lose money on the event. Thus, no producer surplus is collected in this scenario. The problem is that at this price, 150 people want to buy the 100 tickets that are available. So by what mechanism does the Olympic committee allocate these tickets? It seems that, as may be expected, some are allocated to those who have some special involvement with the event (athletes’ families, event organizers like the man discussed in the article mentioned above, etc…), and then the vast majority of tickets are made available online. Is this an optimal way to distribute tickets? Let’s take a look at some graphs to see.

First, let’s look at how much surplus would be generated if the 100 people who valued these tickets most highly just happened to be the ones who received them in the online distribution. The surplus generated under this scenario is shown in the purple area in the first graph below.

 What if, instead, it was the 100 people who valued these tickets the least, but were still willing to purchase them at the price set by the organizing committee (persons 50 - 150)?

As can be seen in the example above, the area of Consumer Surplus is much larger if the tickets are allocated to the 100 people who value them the most. But there’s no guarantee they will be the ones to get through the online ticketing system first.

This is where the Coase Theorem kicks in. The 50 people who value the tickets the least would be willing to sell their tickets to the 50 who value them the most, and at a price that those high-valuers are willing to pay! In fact, they may even be willing to pay a small fee to help match those with tickets with those who to purchase them. Sites like Stubhub, BANDWAGON, and the NFL’s Ticket Exchange have been created to provide this information and, in exchange, try to capture some of this surplus.

The problem is, not only can it be costly to try to find and buy tickets to the event you want to attend, sometimes it is illegal to resale tickets to these sorts of events. For instance, check out this article on an Irish International Olympic Committee executive who recently was “accused of plotting with at least nine others to sell tickets above face value.” Laws like this prevent welfare enhancing trade from taking place, so why would they even exist in the first place?

It is true that there is a fair amount of risk involved in purchasing a ticket in a secondary market. The ticket could turn out to be counterfeit. Many sites offer a money-back guarantee if a counterfeit ticket is purchased, which helps users develop enough trust to use the site (and pay a small fee) rather than purchasing a ticket in person or not buying a ticket at all. Knowing you’ll get your money back is great, but there is an additional cost incurred by those who travel to the sporting event and have been waiting for weeks or months to see their favorite athletes compete, only to be turned away at the date on the day of the race. Penalties for selling counterfeit tickets attempt to address this, but enforcement of those penalties has a cost as well.

Are there any better ways to allocate these tickets, which may avoid some of these costs? One option may be to offer the tickets via an online auction! An auction could sell each seat (or each section of seats) at a different price. If run properly, this method could approximate perfect price discrimination. The result would be a graph that looks very similar to the first graph above, but with the surplus accruing to the producers rather than the consumers. The question is, would the cost of setting up and running this auction reduce surplus by less than all of the costs of the secondary market discussed above. Also, we can’t forget that people may well change their preferences in the time between when the tickets are first allocated and when the event takes place. The change in preferences will cause some people to enter the market, and some to want to sell their tickets after all, so a secondary market may still be beneficial.