By Keya Daruwala | Edited by Aashni Rebello
Imagine that your favourite stand-up comedian is performing live at an event in your city. The tickets are priced fairly low, enough to give you the adrenaline rush that nudges you to book a ticket. You log in to the online ticket booking platform well in advance, feeling confident that you will be able to grab a seat. To your surprise, in the first thirty seconds, just as you are about to enter your payment details, you receive a notification. The event has been fully booked. You feel rather baffled, then disappointed.
What you have just witnessed, is an instance of ticket scalping. Your competitors in the race of booking a ticket were not humans, but scalper robots. These bots are specifically designed to purchase tickets in bulk for resale in the secondary market. Now, on realising that these tickets are being resold on a secondary platform, you get your hopes high once again. Unfortunately, you see that the tickets which had a face value of ₹1000, are now being sold at 10 times the price. You may wonder, what is going on?
An understanding of the demand and supply imbalance, in this case, will help solve your problem.
Figure 1: Supply and Demand curves for Event Tickets
As you can see, in the above figure, the supply of event tickets is fixed at Q0 and is perfectly inelastic, as an increase in the price of a ticket cannot possibly increase the capacity of the venue. The inelastic supply leads to high inelastic demand, setting the equilibrium price as high as P0. The comedian being risk-averse, would prefer to set a lower price that would guarantee a sell-out, rather than setting a high price that would drive away buyers. He may also want to appeal to a larger audience, ensuring that all his true fans, regardless of income status, can afford to attend the event. Hence, he sets the face value of the ticket at P1. However, at this price, the quantity demanded Qd outstrips the quantity supplied Qs, by a huge margin. For the same quantity supplied, buyers are ready to pay as high as P0. Hence, the consumer surplus is given by ABCP1. The producer surplus, on the other hand, is given by P1CD0. Scalpers view this as an opportunity. They take advantage of the high price (P0), which buyers are willing to pay. They use automated software (scalper bots) to purchase tickets sold by the comedian at price P1 in bulk, and resell them at price P0 in secondary markets. Hence, they earn a total profit of P0BCP1, known as scalpers surplus. Now you know the reason behind the inflated prices that appeared on the secondary platform.
Furthermore, two popular opinions emerge from this kind of resale. The first is that scalpers bring about allocative efficiency. Total surplus may not have increased, however, there is a redistribution of surplus which has increased the price level to the point where supply and demand intersect, i.e., to the point of equilibrium. Since the supply is fixed, the price is determined by the demand forces. Hence, the existence of the secondary market allows buyers to indicate how much they want to attend the event, through their willingness to pay. In case they are unable to buy the ticket at the face value, they can always resort to resale platforms. This makes it mutually beneficial for both buyers and scalpers. The comedian benefits too, as he does not have to face the risk of uncertain demand. He is ensured a sell-out due to the presence of scalpers.
The second opinion about this kind of resale has to do with inequality. True fans of the comedian who cannot afford to pay such high prices, may get left out as a result. Also, the scalpers’ surplus would ideally belong to the comedian, had he kept the price level at equilibrium. Hence, the comedian loses out on profits.
As you can see, in economics, there is always a trade-off. It is indeed difficult to classify the scalping practice as right or wrong. However, two possible solutions could help combat the trade-off between economic efficiency and equality. Firstly, the seller should refrain from underpricing tickets. This would leave no incentive for a secondary market to emerge. Secondly, the demand-supply imbalance can be significantly reduced by increasing the supply of tickets. This can be done by increasing the venue size or hosting more events. Together, these solutions would help buyers purchase tickets at a face value that is allocatively efficient.
Crosby, P., & McKenzie, J. (2017, September 10). The economics of ticket scalping. The Conversation. Retrieved December 28, 2022, from https://theconversation.com/the-economics-of-ticket-scalping-83434
Perry, M. J., & Mencken, H. (2016, October 6). Ticket Scalping: Musicians Vs. Economists. American Enterprise Institute. Retrieved December 28, 2022, from https://www.aei.org/carpe-diem/ticket-scalping-musicians-vs-economists/