October 24, 2007 — Pricing Puzzle

Hannah Montana tickets for $250? It's an outrage to fans and parents — but not to economists
By Doug Campbell

Earlier this month, a mother in Greensboro, N.C., sued over scalped concert tickets to her 6-year-old daughter's favorite act — Hannah Montana. Lyn Peraldo paid a ticket reseller $1,050 for four seats. Face value of said tickets ranged much lower, from between $26 and $56.

"The kid doesn't understand that some company has quadrupled the price of the ticket and Mommy can't afford them," the parent told the Greensboro News & Record. Peraldo was referring to children in other families; she said she personally could afford the tickets but was angered nonetheless by the inability of some fans to obtain them.

To economists, this complaint misses the point. The ticket company didn't inflate the price; the forces of supply and demand did. Yes, it may be unfortunate that some little girls won't be able to see Miley Cyrus (the real name of the performer who plays teenybopper Hannah Montana) in concert. The more fundamental issue is that promoters of the Hannah Montana series apparently haven't priced tickets commensurate with demand, opening the door to a secondary market with much higher prices.

"If the promoters are deliberately setting prices low, it seems to me they're just enriching the scalpers," says Stephen Layson, an economics professor at the University of North Carolina, Greensboro. "Parents are objecting to the fact that they have to pay such high prices. But my opinion as an economist is that it's just supply and demand. When supply is very limited and demand is very great, then the market clearing prices are going to be very high. That may seem outrageous but nobody is forcing you to buy your tickets."

Trying to eliminate the secondary market may not be the best idea, Layson says. Outlawing scalpers just raises enforcement costs and does nothing to address the underlying problem of trying to fairly distribute tickets.

While many jurisdictions keep anti-scalping laws on the books — such as ones that restrict the reselling price to a certain dollar amount over face value — they vary widely and are sporadically enforced. According to the News & Record, North Carolina allows ticket companies to charge $3 more than the face value of a ticket, though prices are often much higher than that.

In Arkansas, Attorney General Dustin McDaniel has launched an investigation into Hannah Montana ticket sales. In the news release announcing the investigation, McDaniel said: "In many instances, Arkansas law prohibits resale at prices over the face value plus a reasonable handling charge." He was not specific on what those instances were, and what constituted a "reasonable" handling charge.

Why wouldn't "Best of Both Worlds" promoters — the company selling the tickets for the Hannah Montana tour — want to capture the fullest amount of surplus valuation for tickets? In this case, it may be a simple matter of PR. It simply wouldn't look good to charge 8-year-old fans $200.

Not long ago, this problem might have been eased somewhat. Concert tickets used to be sold at box offices, requiring people to physically stand in line and wait their turn. This is the classic "rationing by queues" economics solution to doling out scarce resources. It gives the tickets to those who would gain the most utility in having them, to those willing to give up a few hours or more waiting in line. Scalpers weigh the financial benefits of spending their time in line for the expected (but not certain) payoff in the secondary market versus using this time for other profitable endeavors.

Many will decide queuing up is not worth it. A better solution, one that doesn't impose the extra expense of forcing people to stand in line, might be a sort of auction. One version would be a system in which a certain number of seats are auctioned off to the highest bidders, with the remaining ones sold for a flat price. This aids the promoter in not over- or underpricing tickets beforehand and more closely mimics a true market for high-valued seats.

The traditional economic view on ticket scalping has been complicated of late with new technology. Now, scalpers need only sit at computer monitors and quickly buy up tickets from brokers' Web sites. In addition, the Wall Street Journal recently reported that many scalpers may have an advantage — new software that, according to one report, allows them to "defeat the various measures" which promoters use to restrict the number of tickets individuals can purchase. This quite clearly makes the playing field un-level, in particular for 8-year-old girls.

Ticketmaster is suing the maker of the scalping software. Meanwhile, attorneys general in several states have launched inquiries into the wider problem.

Online ticket reseller StubHub offers its own "tips for parents on scoring Hannah Montana tickets." Pointers include remaining patient and waiting a week before a show to possibly find "the very best bargains and maybe a surprise for the little one who thought the show was sold out." Also, consider driving to a nearby town: Average Hannah Montana prices vary widely by locale, with New York at $406 and Columbus at $175, according to StubHub.

Farhad Manjoo, a technology writer with Salon.com, proposes a novel solution: Subject prospective ticket buyers to a quiz about the performing artist. This establishes the purchaser's bona fides, helping to distinguish "true fans from scalpers and occasional enthusiasts," Manjoo says. It's an idea similar to what many acts already do: give fan club members first dibs on seats.

Perfect? Of course not. Scalpers could quickly educate themselves and use the same old methods to cut in line ahead of real fans. But at least this approach doesn't meddle with supply and demand.