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Sunday, January 08, 2006

How Are Concert Tickets Like IPOs?

Are concert tickets like IPOs? Not in most people's minds, but there is at least one similarity-- both are often "underpriced" and end up selling in the secondary market for a much higher proce than the inital offering.

How can I call concert tickets "underpriced"? According to this recent Wall Street Journal article (online subscription required),
One of the hottest tickets in Boston is the Rolling Stones tour, which swings through later this month. But it took Keri Heffernan only a few minutes to purchase a pair on an Internet site that links buyers with ticket scalpers.

The catch: She paid $1,004.35 for her seats in the arena's loge level -- triple their face value. " It is unfair," says the 29-year-old pharmaceutical sales representative. "The prices of concert tickets are out of control."

The article goes on to explain that tickets for "hot" concerts like the Rolling Stones are often quickly snapped up at their initial face value by internet buyers who quickly turn around and resell them on the internet for a much higher price.

As an economist, I'd have to say that if people buy the tickets at these prices, thenby definition they aren't overpriced.

What's puzzling is why the concert promoters leave so much money 0n the table and let it be captured instead by the ticket resellers. There's a similar phenomenon in the market for Initial Public Offerings of common stock. One of the big puzzles of finance is why IPOs are so consistently underpriced. By this, I meant that many IPOs end the first day of trading 5% - 10% (or even more) higher than their initial offering price. This underpricing results in many millions of dollars that could have gone to the issuing company going instead to the early buyers, who subsequently "flip" their stock".

So, why don't the ticket issuers "disintermediate" (a fancy term which means "cut out the middleman")? They could set up an auction process just like the scalpers do. In fact, this exactly what some recent IPO issuers have done with "dutch auction" selling mechanisms.

One possible answer is that there's too much risk involved in going this route. So, one reason the middlemen make money is their willingness to take on this risk.

Larry Ribstein at Ideoblog discusses this idea, but also provides another possibility:
Artists (and their promoters) don't want to look like money-grubbing capitalists. After all, "it's about the art", and looking like they're in it for the money is just declasse.

Unfortunately, when demand for a good exceeds supply, there has to be some way of rationing the good. One way is a lottery. Another is by some rule like "first come, first served". Government fiat is another. Finally, you could let the market decide. At least in the final case, the tickets will largely be bought by the individuals who place the highest value on them. I figure, if you want to pay over $1,000 to see some geriatrics prance around the stage, go for it.

As for me, I'd rather buy more coffee, sushi, and CDs with the money.

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