Il buono, il brutto, il cattivo

…or: Why is setting markets free so threatening for so many?

In general I’m not prone to getting too emotional about many things – a (British) colleague once attributed this to my Prairie upbringing, which he equated with quiet pragmatic determination. Don’t get me wrong, passionate yes, but emotional no. However, I must admit to getting completely wound up when I see markets that are shackled and controlled for no obvious purpose (other than to perpetuate the power of a select group of annointed insiders although of course this is never articulated and often (implausibly) vehemently denied.) My angst is made even worse when the restrictions are framed in a ‘this-is-for-your-own/the-public’s-good’ and we know best… What a load of rubbish!

There are (sadly) a million examples of this in the naked city, yes Virginia even in supposed enlightened bastions of freedom, markets and democracy. The catalyst for this particular rant – and perhaps setting the scene for future vignettes of the same kind – was an article in the Economist discussing the extraordinary measures the organisers of the Glastonbury festival went through to kill the secondary market in tickets:

Ticket touting is nothing new, as any West End theatre-goer will attest. But promoters argue that the internet has transformed the business from a few men in grubby coats outside a venue into a fully fledged industry. Sporting bodies and the music industry have been urging an official crackdown on touts for several years.

Defenders paint touting as merely the market’s way of correcting artificially low ticket prices. The deals are between willing buyers and sellers. And touts do not always make a profit. Attendance at Royal Ascot, an annual high-society parade with some horse-racing attached, plummeted when it was moved from Berkshire to York in 2005. Glum touts were offering tickets to curious locals at a fifth of their face value.

Indeed, the existence of a secondary market implies that demand outstrips supply. Why don’t promoters simply charge a market-clearing price for the tickets instead of bashing middlemen who do?

Actually the Economist gets it slightly wrong: the existence of a secondary market implies that the clearing price is not the price at which the sellers have offered the tickets – ie that demand at the sale price outstrips supply. But the question as to why promoters don’t seek out this (clearing) price remains. In fact there are two reasons – one good and one bad – but neither are ever put forward by these promoters to defend or explain their pricing policy, perhaps because neither would lend itself to support prohibition of secondary markets, so they resort to the Ugly argument:

Because that would be “unfair”, they say, leaving “genuine fans” squeezed out of popular events by dilettantes with fat wallets.

The Good
Their pricing policy is predicated on maximizing returns over the medium to long term and reducing uncertainty (volatility) in their cash-flows (thus lowering their future cost-of-capital.) So yes they might ‘leave money on the table’ on an given single event but they create positive marketing spin that feeds into future events and/or ancilliary products. They also attract a more broad and heterogeneous customer base, creating a more robust, sustainable market for their products over time. (Even in the context of the same customer: think of the 20 year old student who can afford to queue for 5 hours but can only afford £20, who 20 years later can’t afford to queue for 5 hours but will pay £200 to see the same act.)

The Bad
By not using price as the rationing method, the intermediary acquires real power by being able to allocate the oversubscribed product subjectively. (And creates a black economy in the process where the face value of the goods bear no resemblance to their real value. Think Zimbabwean dollars…) Unfortunately all too often I suspect the driver (for seeking market control) is for this reason alone.

The article goes on:

Economists (and cynics) offer another explanation. Stefan Szymanski, at London’s Imperial College, points out that it is in promoters’ interests to underprice their products. “You get a much better PR payoff if your event is oversubscribed,” he says. “And since demand is hard to predict, the rational thing to do is to underprice aggressively.” Canny firms recoup their losses on the door by selling overpriced merchandise and refreshments to the captive audience inside. [The Good]

Though ministers have made sympathetic noises to the anti-tout lobby [why???], they have stopped short of banning the practice. Only football tickets are off limits, and that was designed to squelch hooliganism by segregating rival supporters, not to promote social justice. [An example perhaps of the only good reason for intervening in otherwise transparent and functioning markets - ie to protect security; for instance I would not go so as far as to argue for a free market in arms, however the burden of proof (that control is a matter of security) should be robust...)]

So entertainers are looking at other options. The Concert Promoters Association wants to attach a set of conditions to all tickets, preventing resale at a profit. It plans to send them to the Office of Fair Trading for approval. But it seems unlikely that Britain’s competition regulator will rubber-stamp such a price-fixing agreement. [I bloody well would hope not!]

If promoters can’t beat the touts, they may join them, auctioning some tickets off to the highest bidder. “If we can’t get the secondary market outlawed, we’ll take control of it,” says Rob Ballantine, the CPA’s spokesman. That may not put the men in the grey mackintoshes out of business, but it could cramp their style. [Framing the problem in the context of 'control' says it all...it's all about power, not the punter.]

Ok, ok but why get so wound up? It’s just about tickets to sporting events and rock concerts. Well no. This is rather a very good (ie easy to understand) parable of far too many markets for goods and services. And like weeds in a lake, unchecked this behavior risks cutting off the lifeblood of our market economies. The great irony is that in the guise of ‘protecting the common man’ from the ‘brutality’ of the markets, these controllers actually exacerbate and entrench the potential inequality engendered by market forces. This is about individuals or individual groups preferring personal power and wealth at the expense of optimal institutional and economic outcomes. And this behavior is prevalent in far far too many markets for goods and services, including – perhaps especially – in the markets for distributing financial securities. Maybe I should write a book: ‘Memoirs of a Syndicate Manager…’ Anyone (who is honest with themselves) involved in the IPO or debt new issues markets will of course recognize The Good, The Bad & The Ugly.

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• Fans to get refunds as OFT acts on tickets (soccernet.espn.go.com)
• Glastonbury 2009 sells out nearly five months in advance (guardian.co.uk)

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