Scalp ‘Em, Bucky! On, Wisconsin!

December 9, 2010

Scalp ‘Em, Bucky! On, Wisconsin!

My alma mater, the University of Wisconsin, is going to the Rose Bowl this year. One of the student newspapers, The Badger Herald is upset that individuals are reselling tickets at a premium, and it is publishing a list of their names. From the article:

Wisconsin had 5,800 student tickets to sell. They went up for purchase on uwbadgers.com at 9 p.m. Sunday and were sold out by 9:20 p.m.

The above students had the nerve to put their Rose Bowl tickets up for sale on Facebook Marketplace within two hours of tickets selling out. Face value was $150. Some were trying to get the tickets for more than $400 a pop.

Truly, there is a special place in Hell for people who buy Rose Bowl tickets with the sole intention of profiting from them. It is entirely unfair to those who actually love this football team and were counting on a cheap face value ticket in order to make the trip to Pasadena an economic reality.

I understand more about economics than sports, so in my opinion, we’re simply seeing a correction of the market inefficiency resulting from setting the price of a ticket lower than equilibrium. For an individual whose utility from attending the Rose Bowl game is less than $400, it is rational to resell the tickets at a price that exceeds their face value. Instead of being labeled “the worst people on campus,” the individuals listed in the Badger Herald article should be admired for possessing the insight to forecast a market opportunity.

Contributors to Show-Me Daily have discussed previously how ticket scalping improves efficiencies in the market. Last summer, David Stokes led a team of Show-Me Institute interns and staffers on a free-market field trip that demonstrated how ticket scalping is a type of market transaction that can improve the welfare of both buyers and sellers.

The graph below illustrates the market for tickets to the Rose Bowl game. The face value of a ticket, P₀, equals $150 and the equilibrium price, P_e, is higher than this level. From the article, it appears that the equilibrium price is currently approximately $400. At P₀, the quantity of tickets demanded, Q_d, exceeds the quantity supplied, Q_s (i.e., there is a shortage). When individuals are prohibited from reselling a ticket at a price higher than its face value (i.e., when the price ceiling is enforced), dead-weight loss results.

Market for Rose Bowl Tickets

Market for Rose Bowl Tickets

In the presence of scarcity (and tickets to the Rose Bowl are indeed scarce), the price system works to allocate goods and services. Prices coordinate individual action efficiently by communicating relative scarcities and preferences, and individuals signal their relative levels of demand through their willingness to pay. In order to buy a ticket, a person either gives up disposable income, or he reduces his consumption of some other good. When the price system is allowed to work unrestricted, the tickets will more likely end up with the people who have the greatest willingness to pay.

Critics of scalping say that these $400 prices prevent current students who have low incomes from buying a ticket because they tend to lack disposable income. However, tickets to this particular game are already scarce, and capping the price does nothing to alleviate this. This is illustrated in the graph above; when the price ceiling is enforced below the equilibrium price, then the quantity of tickets demanded exceeds the quantity supplied. In other words, even if an administrative entity prevented reselling the tickets at a price higher than P₀, some individuals who have willingness to buy will still miss out on purchasing a ticket. For example, if the tickets were restricted to current students, then then fewer alums who have the means to pay $400 for a ticket will be able to buy one. Furthermore, banning scalping would harm low-income students more than it would help them, because scalping is a potential means for them to generate income.

Critics also say that the event is better off when the student section is packed with loud, rowdy fans. Because the secondary market drives up prices, fewer students may be able to attend, resulting in a crowd that’s more reserved. A rowdy student section certainly has some positive externalities, but these are impossible to measure.

Students at the University of Wisconsin routinely resell tickets at a premium for home games at Camp Randal. During my time as a student, I bought and sold Badger football tickets on several occasions. Why are tickets to the Rose Bowl game any different? Tickets to games against big rivals, like Ohio State or Northwestern, can sell for more than $150 each. This is simply a result of the law of demand. For certain football games (e.g., bowl games), just like any other product, the demand curve shifts to the right and results in a price increase.

The Coase theorem says that transactions will lead to an efficient outcome in situtations in which trade in an externality is possible, transaction costs are zero, and property rights are clearly defined (here, to students). It says that those who will be able to put the tickets to the most highly valued use will end up owning them. Because non-students are buying tickets on the secondary market in this scenario, it’s apparent that this group is not restricted to current students.

« Read Previous Entry Read Next Entry »

15 Wordpress Comments »

The graph isn’t an accurate representation of tickets for a bowl game because the supply curve is vertical. Nothing can be done in the short run to increase or decrease the supply of tickets.

Comment by John Payne — December 9, 2010 @ 3:26 p.m.
I’m afraid the most I got out of Madison was a trip to the Fish Bowl, and I don’t remember what happened after. I think the Badgers won, though.

Comment by Eapen Thampy — December 9, 2010 @ 3:29 p.m.
@John: I thought about that, but I hesitate to say that supply of student tickets is perfectly inelastic. Perhaps the supplier could designate another section for students, or perhaps it could set out some lawn chairs. Regardless, even if supply were perfectly inelastic, it wouldn’t change the conclusion of my analysis — there would still be a shortage, and the equilibrium price of a ticket would exceed its face value. The only thing it would change is the size of the producer surplus.
@Eapen: LOL! I love Wando’s. Go Bucky!

Comment by Christine Harbin — December 9, 2010 @ 3:40 p.m.
Yes. Wando’s. They have a Fish Bowl. Right. I remember vaguely now.

Comment by Eapen Thampy — December 9, 2010 @ 5:15 p.m.
By this argument I wonder what your thoughts are on another example I present below.

There is a perception that gas stations raise their prices during heavy volume times (thanksgiving week, summer travel season, etc). I’ve heard gasoline executives say this isnt the case for several reasons. I’ve heard one gasoline exec on the radio say that the government (not sure if state or federal) does not allow the gasoline companies to ‘price gauge’ like that.

I realize that ticket prices for the rose bowl are likely less government regulated than gasoline prices, but I still wonder if you would commend gasoline companies for increasing prices on high volume weekends(if possible) like you do the student resellers.

Also, the ‘rowdy student section’ often becomes 5 years later the alumni that would like to support the team. The school spirit is most often inspired in them when they are students at football games for discounted prices. If this discount did not occur, I would argue less students would go, thus less students would be spirited fans and less alumni would be spirited fans in the future. This is similar to children prices at baseball games (The Cardinals do this often).

Comment by Adam Lodes — December 9, 2010 @ 7:19 p.m.
secondly i commend The Badger for putting the scarlet W on this students. It is an interesting way for the market to try to balance out. Guilt and shame are excellent disincentives I would think. The fact that the Badger did this on its own, without school officials or any government agency shows at least in some regard that the ticket system works on decent level.

Comment by Adam Lodes — December 9, 2010 @ 7:21 p.m.
I can’t speak for Chrissy here, but I’m entirely in favor of “gouging”:

http://www.showmeinstitute.org/publication/id.99/pub_detail.asp

And in favor of fluctuating market rates for gasoline:

http://www.showmeinstitute.org/publication/id.79/pub_detail.asp

Comment by Eric D. Dixon — December 9, 2010 @ 7:57 p.m.
Chrissy,

You’re rationalizing avarice. These students are making pure profit at the expense of the University of Wisconsin and their fellow students who were unlucky enough to not get the chance to get tickets.

If I could have you study one topic, I would choose…BUSINESS ETHICS.

Comment by David C. Miller — December 9, 2010 @ 9:39 p.m.
Chrissy,

This is a lovely graph! What did you use to make it?

Comment by Abhi S — December 10, 2010 @ 8:16 a.m.
On the matter of the importance of getting excited students in the seats, is there something preventing the school from selling tickets for the low price, but putting other restrictions on it, somehow vetting the enthusiastic from the opportunistic? It wouldn’t be easy, but if their concern is drumming up alumni money in the future, it might make sense to do this. Perhaps they could set aside a block of 100 tickets and make people compete for them by showing their school spirit or some such.

Comment by Josh Smith — December 10, 2010 @ 9:30 a.m.
@Adam: I love the “scarlet W” description.

@DCM: What you’ve just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.

@Abhi: Thank you! I can’t really claim credit, though, since I lifted it from Wikipedia, and then modified it in Powerpoint.
http://en.wikipedia.org/wiki/File:Deadweight-loss-price-ceiling.svg

Comment by Christine Harbin — December 10, 2010 @ 9:48 a.m.
Every business (major college football is a business) has an obligation to maximize it’s profits. If tickets were worth 400 dollars on the open market, the University was leaving 250 dollars on the table for each ticket sold at the lower price. Or to put it another way, 5800 x 250= $1,450,000 in unrealized profits. The atheletic director should be fired. If a private corporation manager lost his company that kind of money, he would be looking for a job.

For major events, I would think the fairest and most effient way to sell tickets would be to auction blocks of tictets, the most desirable tickets first, to the highest bidder to use or resell as they like. Market forces would quickly establish the true worth of the ticket and fans and promoters alike would be satisfied. Those advocating capping the ticket prices at 150 dollars are in effect asking the university to subsidize their afternoons’ entertainment.

Comment by Tom Slawson — December 11, 2010 @ 12:56 p.m.
Just a quick note about the fluctuating gas prices. While it seems to me that free market solutions are desirable, the type of free market solution described for Rose Bowl tickets just might not work for gasoline. This has nothing to do with the economics of it, of course. One just has to wonder whether it is a smart move to encourage hoarding of gasoline when it is cheap in an attempt to circumvent the expected increase in prices during the busiest travel days of the year.

I can only imagine how many people would be so inclined and would store, however well-intentioned, explosive fuel in an unsafe manner. Or, it would encourage the hoarding of fuel for ’scalping’ purposes, undercutting the stability of the fuel market.

Gasoline is different than other products and probably is deserving of minimally intrusive government regulation for the simple fact that our entire economy is based upon it. While a free market solution often necessitates taking the bad with the good, the bad that can come with hyper-fluctuating gas prices (What if owners were allowed to price gouge after 9/11, as in fact some tried to?) ought not to be allowed to happen.

Comment by D. Amiri — December 14, 2010 @ 9:50 p.m.
Re: gouging, I disagree completely. Gouging serves an especially important role in allocating scarce resources after disaster strikes, by ensuring that those acquiring important goods don’t value them too cheaply and thereby overconsume, leaving insufficient quantities for others. The soaring prices also provide a signal to producers and suppliers that more of a particular good is needed, giving them an incentive to mobilize resources to the disaster area (which, in turn, helps to lower price levels naturally).

The more important the good is to the economy — gasoline, for instance — the more important it is to let prices reach their natural market levels. Otherwise, people who undervalue it are likely to overconsume. Prices convey important information about supply and demand. Capping prices artificially distorts that information, and leads to an inefficient allocation of resources.

As chairman of the George Mason University economics department Don Boudreaux put it, using bottled water after a natural disaster as a case in point:

To begin, never pretend that reality is other than what it is. Face reality squarely, fully, and soberly. If this advice sounds trite, understand that governmentimposed prohibitions on “price gouging” mask the underlying reality, shielding people from the truth of it.

If the market value of a bottle of water is $25, preventing merchants from charging a price higher than $5 shields consumers from the fact that potable water is now more precious than it was pre-disaster. The price cap also shields suppliers from this same truth.

The inevitable consequences of this hoax only add to the problems caused by the natural disaster. With the price artificially kept low—at its pre-disaster level—consumers will try to use this now-more-precious commodity today with no more care than they used it yesterday.

But they can only try, for they’ll not succeed in using bottled water with the same nonchalance as they did pre-disaster. Misled by the counterfeit low price, consumers initially will do nothing to use water more carefully. But as fast as you can say “tsunami,” other signals will alert them to water’s now-greater preciousness. Long queues to buy water will emerge, as will empty shelves, black markets, and reports of neighbors hoarding bottled water in their basements.

Not only will most people who want bottled water be unable to buy all they want at the counterfeit price, many will spend valuable time waiting in queues (often to no avail). Some will drive over obstructed roads to buy water in distant towns, while others will use their personal or political connections to obtain water. Time and resources that could be better spent cleaning up and launching the rebuilding effort are diverted to frequently futile efforts to obtain bottled water.

These consequences are avoidable misfortunes compounding the pain of the natural disaster.

Preventing those “avoidable misfortunes” is as simple as eliminating the social stigma associated with “gouging,” and letting prices rise to their natural information-providing levels.

Comment by Eric D. Dixon — December 14, 2010 @ 11:24 p.m.
I agree with you that the artificial depression of prices without regard to their actual price is not acceptable, for the reasons described in your post and other posts above.

However, there is the flipside which I believe we are not addressing.

In the example of gasoline, which I do believe is unique, the demand could be high due to events not directly related to the price of gas, such as 9/11. Many bought gasoline on that day or the day after for fear that prices would rise in the future. What happened, however, is that some gas stations took advantage of the increased demand and jacked up their prices.

Now, if this were most any other product, I would be fine with the price gouging, as it would reflect demand on the ground and as you said would provide a signal to suppliers. I get that.

But gasoline is unique for many reasons: (a) demand is usually very high and relatively constant/predictable (b) practically speaking, one can only buy so much gasoline at one time (c) gasoline is a dangerous substance (d) gasoline is absolutely vital to the national economy (e) gasoline is product derived from an internationally traded commodity at which level prices already reflect speculation of higher/lower demand and supply.

Therefore, at the retail level, the kind of price gouging I am referring to is not really reflective at all of the price of gas but simply a bit of greediness on the part of gas station owners. We normally accept a fair amount of greediness in our society, but a widespread epidemic of price gouging after 9/11 would have crippled our economy for no reason.

Comment by D. Amiri — December 15, 2010 @ 3:27 p.m.

RSS feed for comments on this post. TrackBack URL

Or you can use our new Facebook commenting system!

Categories

The graph isn’t an accurate representation of tickets for a bowl game because the supply curve is vertical. Nothing can be done in the short run to increase or decrease the supply of tickets.

Comment by John Payne — December 9, 2010 @ 3:26 p.m.

I’m afraid the most I got out of Madison was a trip to the Fish Bowl, and I don’t remember what happened after. I think the Badgers won, though.

Comment by Eapen Thampy — December 9, 2010 @ 3:29 p.m.

@John: I thought about that, but I hesitate to say that supply of student tickets is perfectly inelastic. Perhaps the supplier could designate another section for students, or perhaps it could set out some lawn chairs. Regardless, even if supply were perfectly inelastic, it wouldn’t change the conclusion of my analysis — there would still be a shortage, and the equilibrium price of a ticket would exceed its face value. The only thing it would change is the size of the producer surplus.
@Eapen: LOL! I love Wando’s. Go Bucky!

Comment by Christine Harbin — December 9, 2010 @ 3:40 p.m.

Yes. Wando’s. They have a Fish Bowl. Right. I remember vaguely now.

Comment by Eapen Thampy — December 9, 2010 @ 5:15 p.m.

By this argument I wonder what your thoughts are on another example I present below.

There is a perception that gas stations raise their prices during heavy volume times (thanksgiving week, summer travel season, etc). I’ve heard gasoline executives say this isnt the case for several reasons. I’ve heard one gasoline exec on the radio say that the government (not sure if state or federal) does not allow the gasoline companies to ‘price gauge’ like that.

I realize that ticket prices for the rose bowl are likely less government regulated than gasoline prices, but I still wonder if you would commend gasoline companies for increasing prices on high volume weekends(if possible) like you do the student resellers.

Also, the ‘rowdy student section’ often becomes 5 years later the alumni that would like to support the team. The school spirit is most often inspired in them when they are students at football games for discounted prices. If this discount did not occur, I would argue less students would go, thus less students would be spirited fans and less alumni would be spirited fans in the future. This is similar to children prices at baseball games (The Cardinals do this often).

Comment by Adam Lodes — December 9, 2010 @ 7:19 p.m.

secondly i commend The Badger for putting the scarlet W on this students. It is an interesting way for the market to try to balance out. Guilt and shame are excellent disincentives I would think. The fact that the Badger did this on its own, without school officials or any government agency shows at least in some regard that the ticket system works on decent level.

Comment by Adam Lodes — December 9, 2010 @ 7:21 p.m.

I can’t speak for Chrissy here, but I’m entirely in favor of “gouging”:

http://www.showmeinstitute.org/publication/id.99/pub_detail.asp

And in favor of fluctuating market rates for gasoline:

http://www.showmeinstitute.org/publication/id.79/pub_detail.asp

Comment by Eric D. Dixon — December 9, 2010 @ 7:57 p.m.

Chrissy,

You’re rationalizing avarice. These students are making pure profit at the expense of the University of Wisconsin and their fellow students who were unlucky enough to not get the chance to get tickets.

If I could have you study one topic, I would choose…BUSINESS ETHICS.

Comment by David C. Miller — December 9, 2010 @ 9:39 p.m.

This is a lovely graph! What did you use to make it?

Comment by Abhi S — December 10, 2010 @ 8:16 a.m.

On the matter of the importance of getting excited students in the seats, is there something preventing the school from selling tickets for the low price, but putting other restrictions on it, somehow vetting the enthusiastic from the opportunistic? It wouldn’t be easy, but if their concern is drumming up alumni money in the future, it might make sense to do this. Perhaps they could set aside a block of 100 tickets and make people compete for them by showing their school spirit or some such.

Comment by Josh Smith — December 10, 2010 @ 9:30 a.m.

@Adam: I love the “scarlet W” description.

@DCM: What you’ve just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.

@Abhi: Thank you! I can’t really claim credit, though, since I lifted it from Wikipedia, and then modified it in Powerpoint.
http://en.wikipedia.org/wiki/File:Deadweight-loss-price-ceiling.svg

Comment by Christine Harbin — December 10, 2010 @ 9:48 a.m.

Every business (major college football is a business) has an obligation to maximize it’s profits. If tickets were worth 400 dollars on the open market, the University was leaving 250 dollars on the table for each ticket sold at the lower price. Or to put it another way, 5800 x 250= $1,450,000 in unrealized profits. The atheletic director should be fired. If a private corporation manager lost his company that kind of money, he would be looking for a job.

For major events, I would think the fairest and most effient way to sell tickets would be to auction blocks of tictets, the most desirable tickets first, to the highest bidder to use or resell as they like. Market forces would quickly establish the true worth of the ticket and fans and promoters alike would be satisfied. Those advocating capping the ticket prices at 150 dollars are in effect asking the university to subsidize their afternoons’ entertainment.

Comment by Tom Slawson — December 11, 2010 @ 12:56 p.m.

Just a quick note about the fluctuating gas prices. While it seems to me that free market solutions are desirable, the type of free market solution described for Rose Bowl tickets just might not work for gasoline. This has nothing to do with the economics of it, of course. One just has to wonder whether it is a smart move to encourage hoarding of gasoline when it is cheap in an attempt to circumvent the expected increase in prices during the busiest travel days of the year.

I can only imagine how many people would be so inclined and would store, however well-intentioned, explosive fuel in an unsafe manner. Or, it would encourage the hoarding of fuel for ’scalping’ purposes, undercutting the stability of the fuel market.

Gasoline is different than other products and probably is deserving of minimally intrusive government regulation for the simple fact that our entire economy is based upon it. While a free market solution often necessitates taking the bad with the good, the bad that can come with hyper-fluctuating gas prices (What if owners were allowed to price gouge after 9/11, as in fact some tried to?) ought not to be allowed to happen.

Comment by D. Amiri — December 14, 2010 @ 9:50 p.m.

Re: gouging, I disagree completely. Gouging serves an especially important role in allocating scarce resources after disaster strikes, by ensuring that those acquiring important goods don’t value them too cheaply and thereby overconsume, leaving insufficient quantities for others. The soaring prices also provide a signal to producers and suppliers that more of a particular good is needed, giving them an incentive to mobilize resources to the disaster area (which, in turn, helps to lower price levels naturally).

The more important the good is to the economy — gasoline, for instance — the more important it is to let prices reach their natural market levels. Otherwise, people who undervalue it are likely to overconsume. Prices convey important information about supply and demand. Capping prices artificially distorts that information, and leads to an inefficient allocation of resources.

As chairman of the George Mason University economics department Don Boudreaux put it, using bottled water after a natural disaster as a case in point:

To begin, never pretend that reality is other than what it is. Face reality squarely, fully, and soberly. If this advice sounds trite, understand that governmentimposed prohibitions on “price gouging” mask the underlying reality, shielding people from the truth of it.

If the market value of a bottle of water is $25, preventing merchants from charging a price higher than $5 shields consumers from the fact that potable water is now more precious than it was pre-disaster. The price cap also shields suppliers from this same truth.

The inevitable consequences of this hoax only add to the problems caused by the natural disaster. With the price artificially kept low—at its pre-disaster level—consumers will try to use this now-more-precious commodity today with no more care than they used it yesterday.

But they can only try, for they’ll not succeed in using bottled water with the same nonchalance as they did pre-disaster. Misled by the counterfeit low price, consumers initially will do nothing to use water more carefully. But as fast as you can say “tsunami,” other signals will alert them to water’s now-greater preciousness. Long queues to buy water will emerge, as will empty shelves, black markets, and reports of neighbors hoarding bottled water in their basements.

Not only will most people who want bottled water be unable to buy all they want at the counterfeit price, many will spend valuable time waiting in queues (often to no avail). Some will drive over obstructed roads to buy water in distant towns, while others will use their personal or political connections to obtain water. Time and resources that could be better spent cleaning up and launching the rebuilding effort are diverted to frequently futile efforts to obtain bottled water.

These consequences are avoidable misfortunes compounding the pain of the natural disaster.

Preventing those “avoidable misfortunes” is as simple as eliminating the social stigma associated with “gouging,” and letting prices rise to their natural information-providing levels.

Comment by Eric D. Dixon — December 14, 2010 @ 11:24 p.m.

I agree with you that the artificial depression of prices without regard to their actual price is not acceptable, for the reasons described in your post and other posts above.

However, there is the flipside which I believe we are not addressing.

In the example of gasoline, which I do believe is unique, the demand could be high due to events not directly related to the price of gas, such as 9/11. Many bought gasoline on that day or the day after for fear that prices would rise in the future. What happened, however, is that some gas stations took advantage of the increased demand and jacked up their prices.

Now, if this were most any other product, I would be fine with the price gouging, as it would reflect demand on the ground and as you said would provide a signal to suppliers. I get that.

But gasoline is unique for many reasons: (a) demand is usually very high and relatively constant/predictable (b) practically speaking, one can only buy so much gasoline at one time (c) gasoline is a dangerous substance (d) gasoline is absolutely vital to the national economy (e) gasoline is product derived from an internationally traded commodity at which level prices already reflect speculation of higher/lower demand and supply.

Therefore, at the retail level, the kind of price gouging I am referring to is not really reflective at all of the price of gas but simply a bit of greediness on the part of gas station owners. We normally accept a fair amount of greediness in our society, but a widespread epidemic of price gouging after 9/11 would have crippled our economy for no reason.

Comment by D. Amiri — December 15, 2010 @ 3:27 p.m.

December 9, 2010