Invest now, Party Later, Spend Never
Behavioural economics says nightclubs won't ever curb ticket resales
19 February 2020
The ever-long queue to The Bridge, a popular west Oxford club
There are few more hated in the online world of Oxford University than ticket scalpers. Hustlers purchase tickets for Oxford's most popular clubs and resell them at exorbitant prices to coveting students. Why have the original vendors, the clubs, not put a stop to this behaviour in the example of popular plays, music concerts, and sports matches? Simply – they are incentivised not to do so. The theory stems from three curious aspects of microeconomics: market efficiency, the principal-agent problem, and behavioural economics.
Let's start with market efficiency. Imagine a world where club vendors are able to auction off every ticket. From this, the seller derives two benefits. Firstly, they maximise profit, since every ticket is purchased at the highest value any buyer could place on it, and any consumer surplus is minimised, that is, the difference between willingness to pay and actual price. Students compete with each other until all of that willingness to pay has been transferred by the ticket's rising price to producer surplus. The second is that every buyer really wants to be there. All those students out-competing peers for a ticket must be those who most want to spend five hours of their night in a sweaty Bridge corridor: they're likely to arrive early, leave late, buy lots of drinks, and rave about how great it was afterwards. In other words, the clubs find these customers ideal and these buyers most appreciate the clubs. We term this symbiosis ‘allocative efficiency’ and it is clearly mutually beneficial. From their perspective, clubs should sell their tickets by auction.
Permitting ticket scalpers creates a pseudo-auction environment. A true auction suffers obvious drawbacks; clubs would lose logistical and reputational costs. Meanwhile, buyers would complain over equity: those who have most money, rather than most need, might outbid all others for access to a club night. By contrast, scalpers initiate an effective auction, posting adverts on OxTickets, a Facebook group, and accepting the highest from private offers made. Though vendors sacrifice profit-maximising seller-side benefits, they capitalise on the second advantage, selecting attendees who most want to be there and have the highest propensity to spend. By contrast to an auction, scalpers soak up the logistical and reputational costs.
A second dimension concerns the principal-agent problem, which arrives when any producer grows large enough that it must delegate its management of sales. If the producer and seller are a single entity, they maintain an obvious incentive to sell at profit-maximising levels. When that work is delegate to employees, producers have to carefully consider the incentives of their salesmen. A textbook solution is to offer a a commission rate per sale. Through scalpers, club vendors take this to the extreme. By letting scalpers resell to the highest bidder, vendors accept a fixed wage per ticket and transfer the entirety of margin on each ticket to the scalper. Why do they permit this? One advantage is certainty. A commission proportion of 1 serves as a transfer of risk; the vendor no longer has to worry about whether it will sell out. An alternative interpretation is that the club has no choice when endeavouring to profit-maximise. For the same reason that auctions are infeasible, vendors cannot efficiently price discriminate whilst scalpers can, so such a level of profit-margin was never available to the club vendors anyway.
This latter argument is convincing, but recent studies in behavioural economics offers support to the former. Any club is worried about risk: undertaking high factor prices including renting out the venue, high wages to staff who have to endure late nights, long hours, and mess, and high risks of unexpected costs of damages, clubs would like to guarantee their income through consistent ticket sales. Behavioural economics tells us that scalpers are the perfect candidates to help clubs achieve this.
Firstly, scalpers ignore sunk costs. Scalpers see ticket-purchasing as a business decision; a cost to be made back in revenue. Consumers, meanwhile, might reconsider if this ticket is truly worth the value of the club night experienced or be more sensitive to price changes. Scalpers have no such qualms.
Secondly, scalpers buy aggressively. This can be framed through the tendency to overvalue bargains. Classical economic theory suggests that each consumer purchases at the value the good holds to their utility; for instance, if a club night does not provide £6 of 'value' to the buyer, they would not pay it for the ticket. In reality, such valuations are ambiguous. Most people don’t get their idea of 'good value' from the intrinsic value to their own utility, but for the 'going' price of that good they see around them. If club tickets around Oxford are generally £6, buyers will pay £6. If a single club decides to increase it to be £8, buyers would be outraged, regardless of whether that extra £2 crossed their intangible threshold of marginal utility. Conversely, whenever bargains are offered, most people cannot resist. The fact that scalpers buy in bulk magnifies this effect. In believing that all their tickets will be sold on and deriving a tangible benefit from each purchase via margin per sale, rather than the intangible utility of a consumer, scalpers are insensitive to any price raise and overestimate gains from bargains compared to risk. This causes a tendency to over-purchase by scalpers, which offers certainty to club vendors.
Finally, scalpers are careless consumers in themselves. Understanding this behaviour comes from the framing of thought processes between a 'thinker' or a 'doer'. The thinking part of the scalper buys a large number of tickets, believing they will surely sell them on. The scalper's 'doer' mentality reaches 9PM on the night, remembers they too are a pleasure-seeking student, inebriated with friends, and resolves to keep one of those tickets for themselves. Any other businessman, from exporter to middleman, writes that off as a loss. Consuming one's own product incurs an opportunity cost. Yet at the time of decision, scalpers are unlikely to see it that way. They are tempted by personal pleasuring, abandoning rational accounting. Similar behaviour is observed among wine collectors, who might self-indulge in a case of decade-old Bordeaux but show little regret. A curious transition occurs from opportunity cost to the scalper at the time of purchase to sunk cost at the time of consumption, further making them ideal consumers for vendors.
In all, scalpers have particular preference attributes that are particularly desirable to club ticket vendors seeking. With such strong incentives keeping them here, ticket scalpers are a likely feature of the Oxford club market for generations of students to come. ∎