Dr. Happel And Dutch Auctions

The NBA, through Ticketmaster, began its crackdown of the secondary ticketing market in 2012, using the ticketing company’s TicketExchange platform for its ticket resales. NBA exec Chris Granger said at the time it was a “revolutionary approach” and was “the first time in ticketing history” where the primary tickets would be sold alongside the secondary inventory. The partnership between the NBA and Ticketmaster was recently called into question by StubHub. With the surge of San Francisco’s Golden State Warriors and its post-season popularity, season ticket holders are willing to sell their seats to the highest bidder but can only do so through TicketExchange. 

TM and the Warriors threatened to cancel the season tickets of the owners who tried to sell them elsewhere, according to a lawsuit filed by Stubhub, which claims the Warriors and TM have an illegal monopoly on resale. One person who agrees, in theory, is Dr. Stephen Happel, professor emeritus of economics at Arizona State University.

Happel and Dr. Marianne M. Jennings are longtime advocates of ticket resale, citing the basic economic laws of supply and demand. Through papers like “The Eight Principles of the Microeconomic and Regulatory Future of Ticket Scalping, Ticket Brokers, and Secondary Ticket Markets,” in which they go toe-to-toe with artists like Bruce Springsteen, Jennings and Happel have argued for the value of the secondary ticketing market. They note that lobbying for legislation to stop it is an exercise in futility.

Scalping has been around since the days of Shakespeare, it’s never going away, and they have testified to that effect. Happel, who has attended Pollstar Live’s predecessor, the Concert Industry Consortium, spoke to Pollstar at length about how he came to these conclusions and then suggested an alternative to the current model that could put more cash in the artist’s pocket and minimalize the encroachment of the secondary market. Hopefully it will generate a discussion within the industry and at our next conference. 

Let’s start off by asking how you got to this conclusion.

In 1987, I went to a World Series game in St. Louis; I had grown up in a town north of there. When I was a boy, ticket scalping was almost akin to murder. August Busch controlled St. Louis, so the city had pretty strong anti-scalping laws. I was walking around Busch Stadium when I saw a college student with a sandwich board: “Oklahoma State college student. Hitchhiked all the way from Stillwater for twenty-three hours. Cardinals fan my whole life. Please sell me a ticket.” I watch for about 10 minutes. Out of the crowd comes a prototypical scalper: slicked hair, trench coat. The whole nine yards. They talked, the kid hands him money, the scalper hands him a ticket. Out of the crowd comes a plainclothes police officer and arrests the scalper, confiscates the ticket, and tells the student he will have to come to the station tomorrow to get his money back. I was just appalled and told the police officer so.

He said, “You better be quiet sir or I will arrest you for obstruction of justice.” So I go back to Arizona and convince my colleague, Marianne Jennings, a professor of legal and ethical studies, to start digging into this. In 1989, we write this article saying we think its sheer folly to try to prevent ticket brokers, scalping, or whatever you want to call it. Since then, we’ve written a host of articles and testified before various state legislatures. Marianne had a graduate student go through all the states and dig out the laws involving what each state said about resale. Some states like New York and New Jersey had tough laws.

There were other states like South Dakota that didn’t have any laws at all. In Arizona the only law was you couldn’t resell tickets within 200 feet of the entrance to a stadium. So we categorized the laws, concluded that the resale of tickets was beneficial to consumers in total, and preventing resale above face value is a price control. As an economist, I know what price controls do. In the end they hurt consumers. The next big incident for us was the NBA All Star Game here in Phoenix in the mid-90s when the city council was under pressure from the Suns to prevent street scalping on game day. We lobbied the council to designate an area across from the stadium where ticket trading would be legal. It was kind of a trading pit, and we wrote that up in the Wall Street Journal. It went from there.

What’s the feedback been like over time?

It’s quite interesting. There was a time I would get at least a call a month, maybe more than that, from journalists – typically younger individuals – who are all gung ho to question free markets. There will be some law that’s going to be passed someplace and they come across the articles that Marianne and I have written. They call to say, “We don’t like scalping.” We patiently explain why it’s good for consumers. By the time we’re done, we’ve often convinced them that you want this kind of free market in the secondary ticket market. You want a vibrant market, and that’s what’s so disconcerting about Ticketmaster and others seeking harsh restrictions.

Basically, Ticketmaster wants to control the secondary market as well as the primary market. As I’ve said over and over again, I don’t care if Ticketmaster is the only seller in the primary market. I’m not wild about that idea, but a vibrant secondary market will protect consumers. Over the past three or four years, Ticketmaster has gone into a number of states directly or behind the scenes to get laws passed to say the primary seller can designate the sole reseller of the ticket. What they’re doing with Golden State Warriors is a prime example. They’re also restricting the market in other sports Don’t get me wrong: If I were Ticketmaster, I’d probably be doing the same thing! They’re trying to maximize profits. But I’m coming from the consumer’s point of view and I think such a vertical monopoly is harmful in this regard.

The standard line in the concert industry goes as follows: The primary ticket price cannot go too high because it reflects poorly on the artist. Brad Paisley doesn’t love his fans if he has a high ticket price. But the primary seller hates the secondary market because the money doesn’t go back to the artist ….

Right, right, right. I know all these arguments. So let’s start. Why do you have a vibrant secondary market? Because ticket prices are too low to begin with. And you can get into a thousand arguments why that’s the case. One argument is the Bruce Springsteens of the world. I’ve gone to war with Springsteen over this stuff and have been quoted in newspaper articles about it. He says he wants to be fair to his fans. In the mid-80s when he’s trying to prevent scalping at the Meadowlands, he’s enraged there are diggers and droids, homeless people who have been hired to buy tickets. He recognizes that many of his fans are blue-collar, and he’d say, “My true fans can’t get in because the scalpers buy all the tickets.” But he started with too low a price to begin with. That’s why scalpers are buying tickets like crazy. In addition, you have “true” fans standing in line for hours, they get to the front of the line, they pay $50 for a ticket and there’s a broker standing right there saying, “I’ll give you $300.”

It’s amazing how quickly some “true” fans then become resellers. Marianne and I have argued that the only way you can guarantee, at the too-low price you are charging, that your true fans are in the stands and in the best seats is you escort them to their seats. You let them line up for the event, you sell them only one ticket, they can’t turn around and resell it, they can’t buy extra tickets, and you escort them to their seat. Interestingly, Springsteen does, now, escort some people to their seats at his concerts. You cannot protect the true fans by too low a price because you’re always, always going to have scalpers who are arbitraging. This has been going on since the 1850s in the U.S… People used to scalp tickets to Mark Twain’s book readings.

As long as prices are too low, which they are, you’ll always have the secondary market. You’re fighting the laws of demand and supply. Besides the “We want to be fair to fans” argument for low prices, promoters and artists may want to intensify demand with low prices to show popularity or to achieve a quick sellout to have the ticket revenues in hand. Another possibility is that low prices serve as a loss leader – you get people into their seats and then you nail them on the concessions. There are a variety of reasons why ticket prices are too low, but again the fundamental fact is ticket prices are too low based on the laws of demand and supply.

In contrast to artists who want to be fair or who hold back good tickets and then surreptitiously sell them on secondary markets, look at Katy Perry: I love Katy Perry for what she announced a year ago. “I’m not only going to sell all my tickets in the primary market. I’m going to take some of my tickets and resell them on the secondary market for whatever they’ll bring me.” Rather than playing games and trying to appear as a savior, she was up front about maximizing ticket revenues. One of the things I don’t understand and maybe you can enlighten me is why you don’t have Dutch auctions with concerts. The Rolling Stones are going on tour. Why don’t the Stones say, “For the first week, tickets will be $1,000? The second week we’ll drop them to $900. You can decide when to hop into the market.” I don’t understand why there isn’t more of that.

That’s a good question. Discussions about dynamic ticket pricing started to show up a decade ago.

Dynamic pricing makes perfect economic sense. The problem is that promoters typically do not have the detailed knowledge about consumers to charge the maximum price possible. I know a lot of the brokers/scalpers in this town who tell me they have clients who will buy high when so-and-so comes to town. “We want front row, seats 2 and 3. We’ll pay whatever it takes.” The brokers have more detailed information about their customers than the venue, so they take advantage of that. That’s why brokers are willing to hop into the market even when initial prices seem “high.” Moreover, as market conditions change, and in contrast to many sports teams, brokers will sell tickets at below face value to clear the inventory. It’s not always them jacking up prices.

Correct me if I’m wrong but a Dutch auction would be different than dynamic ticket pricing?

Yeah, a Dutch auction is where you just announce all tickets are $1,000 for say the first week, first come first served. Then the second week we’ll lower what’s left to $900 and we’ll keep lowering prices until we sell out. So in theory it is not as detailed as dynamic pricing. This would be a situation where there could be much bigger profits for promoters and artists and it would really put a lot of pressure on the brokers. Now they will have to think long and hard about when to hop into the market. Do they want to pay $1,000? Plus people can call up and get the tickets immediately rather than going through a broker. In the ’60s, prices for concerts were really low – $5, $10.

You didn’t see Major League Baseball, for instance, much engaged in dynamic pricing. They may have two or three price levels for seats. I asked various people why and the argument was the old guys were worried about being branded profit-maximizing bastards, and the resulting bad PR. I think one reason why you’re probably not having Dutch auctions is the PR effect: “Oh, look who’s going to get the best seats: the rich. It’s not fair to the public.” But I have my answers. People pay different prices for airline tickets today and it has not led to a massive public outcry for a change.

Also, to me someone is a true fan if he or she is willing to pay the going market price—a point younger generations seem far more willing to accept today than they did in the 60’s. I have classes of 400, and on the first day I’ll ask them, “How many people in this room think ticket scalping is good, overall for the consumer?” And 80 percent of the hands go up. Finally, to go back to the Springsteen story, charging uniformly low prices does not prevent upper income individuals from getting the best seats. What Marianne and I want is a vibrant secondary market that is transparent. We would like artists to have to say we’re holding back x-amount of tickets from the primary market, but the holds tend to remain in the shadows.

On Reddit they have “The Button.” It has a stopwatch of 60 seconds and you can wait to press it and, if you wait, you get a reward. However, most people – almost a million now – click it within the first five seconds. They can’t wait. I’d like to think the same could happen with a Dutch auction for a concert: People will pretend to be patient but will probably just say “Screw it” and buy the $1,000 tickets immediately. I see your point. That would probably be the effect, at least initially. It would depend on the artist. The Eagles or the Stones would have tickets go immediately. But there would be less-popular artists where people might wait and, if there were a couple Dutch auctions where people did wait and tickets dropped to a “reasonable” or low level, I think you’d start to see people waiting longer. I think it would be an interesting study in economics.

There are some artists out there that just want to do arenas, even if they’re half-full. They’re just not going to go back to theatres. But if some of the last-second tickets were $3, you’d get a lot more people to fill the seats.

That raises an interesting point, and I’ll relate this to the Phoenix Suns. The Suns are no longer selling upward-level tickets to brokers. One of the arguments is – let’s say the broker pays $10 and are stuck with the ticket and has to sell it at $3 – the Suns don’t like to see their tickets selling for $3. That would be one of the issues with a Dutch auction for concerts. Even if it’s $3 in their pocket rather than having the seat empty, the PR might be, in their minds, so detrimental that it shows they’re not in demand.

True but there has always been the tradition of quietly “papering the house,” and that’s been accepted. Promoters still try and fill up the building, even for free.

Good point, as long as the papering price is not widely advertised and thus creates bad PR. I’m interested what the feedback would be – if promoters or artists read this and would give their feedback on the perils or the advantages of Dutch auctions. Again, it would seem to me, if I was running a Dutch auction, I would start it off with really high prices, say $1000 the first week for a popular act! And even if I didn’t sell at $1000, I’d start off high and keep coming down. My goal would be to sell out the arena even if I had to sell seats at a $1. But I imagine there are artists out there that would think that it’s bad PR.

Here’s another traditional argument against changing the dynamic: the artist, manager and agent do not want to assume risk; that’s the job of the promoter. They want their guarantees up front, and it’s the promoter’s “fault” if the show doesn’t sell. The artist’s camp doesn’t want to assume part of the hit if the Dutch auction goes too low. They also don’t want to watch their fans down-vote their pricing and, therefore, their popularity.

I see the point. Of course the promoter could pay the artist a guarantee and then use a Dutch auction and get all of the proceeds. The artist is likely to demand a high premium. Plus the problem from the artist’s point of view is that if many of the tickets are sold at the low end it sends negative signals that might impact future sales. In this case it might be better to have unsold tickets at a higher price, I suppose. But for infrequent (non-touring) events like the Super Bowl, the NCAA Finals, or a special one-time only concert I see the Dutch auction as a real alternative.

Pollstar and Dr. Happel are interested in what the readers of our publication may think of the Dutch auction concept. Is it even feasible and, if so, at what level? Please leave comments below or email us at [email protected]. We will consider publishing comments online or in an upcoming issue.