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Tuesday, February 10, 2009

Bruce Springsteen vs. TicketMaster

Articles on current events seem to be more popular than others. It's one thing to say "The State sucks!" It's another thing to relate it to current events and people's direct experiences.

Ticketmaster is a corporation with a State-licensed monopoly that uses its market power for obvious evil. Ticketmaster charges *HUGE* fees. These fees indicate monopolistic practice and rent-seeking.

There was a recent high-profile dispute between Bruce Springsteen and Ticketmaster. Bruce Springsteen was playing in a concert. The tickets were made available for sale online, but sold out nearly instantly. Fans who wanted to buy the ticket were redirected to Ticketmaster's resale website, where they were charged something like 10x the original face value of the ticket. Ticketmaster collects a 30%+ commission on tickets sold on its resale site. (No third solution had an interesting recent post on getting ****ed over by TicketMaster. I don't normally attend concerts, so I'm not familiar with the evil of Ticketmaster.)

The way that Ticketmaster and most arenas sells tickets is defective. They pick a fixed price ahead of time, before tickets go on sale. There is a theoretical price $X, where "number of buyers" equals "tickets available". In a free market, as ticket prices rise, some people would prefer other things. In a free market, this price $X should also be the price that optimizes profits for the arena vendor. (There are other factors. For example, tickets closer to the stage should obviously be sold for more. In this example, I'm assuming every ticket has equal value, for simplicity.)

A price is fixed ahead of time. Call this price $Y. If Y>X, then there is an embarrassment as some tickets are unsold. If the surplus tickets are then sold at a discount, then the people who purchased the ticket for $Y get offened at the later discount.

If Y is less than X, then there is an arbitrage opportunity for scalpers. They may buy at $Y and then re-sell the ticket for $X. Picking Y less than X guarantees that the concert will sell out, but it creates a profit opportunity for scalpers.

To avoid the "buy at $Y, sell for $X" fiasco, Ticketmaster put a Captcha test to prevent someone from automatically buying up all the tickets the instant the sale period begins. However, ticket scalpers have compensated by hiring people in India to take Captcha tests for $1/hr! There is profit to be made from buying at $Y and selling at $X. Professional scalpers are naturally seeking this arbitrage, especially for a *HOT* event like a Bruce Springsteen concert.

For Bruce Springsteen's concert, $Y was *MUCH LESS* than $X. This led to the outrage. Further, Bruce Springsteen is a well-known celebrity. If he goes around saying "Ticketmaster screwed me over!", then the mainstream media cannot refuse to cover the story. Even though Ticketmaster is the one profiting, Bruce Springsteen looks bad because he's responsible for his concert. Bruce Springsteen has a legitimate complaint that his fans could be alienated by this process.

Ticketmaster has a State-licensed monopoly. As usual, State laws and regulations restrict competition. Ticketmaster has locked up many arenas in "exclusive licensing" agreeements. The arena has agreed, years ahead of time, that all events they host will have the tickets sold by Ticketmaster.

Even if Bruce Springsteen had no personal contract with Ticketmaster, he is SOL if the arena had a contract with Ticketmaster. As usual, the "kickbacks to executives" process encourages arena management to sign long-term exclusive deals with Ticketmaster. If the "exclusive ticket sales" contract is worth $10M, then $200k of kickbacks can be provided to the arena executive or his brother-in-law.

Ticketmaster has signed many arenas and bands to long-term exclusive agreements. This makes it hard to form a competing business. A hot young band isn't going to notice or care that their agent just signed a 10 year exclusive deal with Ticketmaster. Besides, most of the arenas they perform in have a deal with Ticketmaster.

Here's how I would sell tickets, if I were hosting an event. Suppose there are 10,000 tickets available. For now, I assume all tickets have equal value. I would hold a "dutch auction" to determine the price. Here's how a dutch auction works.

Suppose I allow 1 week for people to submit bids. Suppose there are 5000 people who say "I'm willing to pay $20", and 7000 people who say "I'm willing to pay $15" and 5000 people who say "I'm willing to pay $10". In this case, the auction-clearing price is $15. In a dutch auction, if you bid more than the clearing price, you only pay the clearing price. (This encourages honest bidding.) The 5000 people who bid $20 only pay $15 and get their tickets. The 5000 people who bid only $10 don't get tickets. Only 5000 out of 7000 of the people who bid $15 get their tickets.

A "dutch auction" is the way the NYSE and NASDAQ determine opening and closing prices.

I also would give the higher bidders the better seats. Based on bidding history, I might create better tiers. For example, suppose that in above example there were 200 people who bid $200. In that case, I might make a higher tier of ticket for the front row and maybe give them extra perks like an autographed picture.

Another advantage of a dutch auction is you don't have the rush to buy tickets right away. Everybody has a fair chance to place their bids. If you bid more than the clearing price you only pay the clearing price, so the incentive is for people to publish honest bids. You don't risk die-hard fans being shut out if they weren't able to buy tickets in the first minute. The current ticket sales system benefits scalpers.

With computers, it's very easy to conduct a dutch auction to sell tickets. You could even do it with pencil and paper and index cards.

That's another advantage of selling tickets via a dutch auction. You find out what your customers want and how much they're willing to pay. I suspect that the dutch auction clearing price would also be the price that maximizes profit for the seller, although I haven't seen real-world data.

Suppose there was a degenerate scenario. One hundred people are willing to pay $1M, but everyone else is only willing to pay $10. In that case, the price that maximizes my profit is $1M leaving the arena mostly empty, but the dutch auction clearing price is $10. In that degenerate scenario, I optimize my profit by giving a private performance for 100 people. I should have booked a small nightclub instead of a huge arena. With more realistic data, the dutch auction clearing price should also be the profit-maximizing price.

Also notice that the dutch auction process gives you feedback on the desires of your fans. If I discover that there are a small group of people willing to pay *A LOT* to see me, then I should schedule some small performances and charge a lot per ticket. Another advantage of playing to an audience of 100 is that I can give some personal attention to each audience member, such as a photograph and autograph for each of them. (One nice thing about my blog is that I can take every reader comment seriously. If you write a mainstream media outlet, your odds of getting a response are practically zero.)

If necessary, two tiers of tickets can be sold. For example, the front three rows can be sold at a separate auction from the rest. Those fans can be given other perks, such as an autograph.

If I attempt "promote agorism via standup comedy" and host my own events, I'd write up a "sell tickets via dutch auction" open source engine.

Selling tickets via dutch auction is much fairer than the current "First person to call gets the tickets!" system. In the present, Ticketmaster has no incentive to switch to a dutch auction system, which would be much fairer.

I consider "sell concert tickets via dutch auction" to be an obvious non-patentable idea. It isn't worth my time to bother with a patent. By mentioning it here first, I prevent someone from suing me if I try to actually implement such a system later. The stock market uses a dutch auction to determine the opening and closing price. I'm just applying that concept to concert ticket sales.

Ticketmaster profits handsomely from the current corrupt system. They have a State-licensed monopoly and no incentive to change. Even if I tried making "Ticketmaster-killer" as an on-the-books business, abusive practices by Ticketmaster would make it hard for me to get contracts with performers and arenas. Suppose I got some traction with a "Ticketmaster-killer" business. It would be in Ticketmaster's best interests to buy out my business, using their State licensed monopoly. For example, suppose my business becomes worth $20M, then Ticketmaster can merely borrow $50M from a bank and offer to buy me out for $50M. State restriction of the market then would make it very hard for another new competitor to emerge.

Monopoly-busting businesses tend to be the most profitable. Of course, the most abusive monopoly that needs busting is that of the State.

If I ever give performances and sell tickets, I'd do it directly myself instead of using Ticketmaster. It'd probably be profitable to hire someone to answer the phones and do it manually, instead of paying Ticketmaster an extortionate fee.


Anonymous said...

Excellent point on the Dutch auction.

The fact that it's not a Dutch auction already has more to do with the dishonesty of prevailing business types and their money-grubbing attitudes of trying to manipulate their way to the maximum profit possible rather than a lack of creativity.

fritz said...

I want to see your stand up comic performance on the evil state, And pro Agorism jokes.I will start the Dutch Auction with a bid of 1 troy ounce of gold.

Hook me up with a front row seat and an autograph picture please..


derp said...

You're proposing a first-price sealed bid auction, not a Dutch Auction. The Dutch Auction actually handles heterogeneous products (such as concert tickets or tulip bulbs) much more smoothly.

Price all the tickets at some arbitrarily high price to begin with and then decrease the price as a function of time. Allow people to make bids lower than the current price for any seat, if the price falls to that point, they pay their bid.

I suspect they don't do this for the same reason movie theatres don't price discriminate on opening night: it makes stupid people mad.

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