StubHub Shows Up The Boss

Back in 1965, long before Ticketmaster, StubHub, and TicketsNow, legendary rock music promoter Bill Graham noticed that mass parties erupted wherever local rock groups played. Graham realized that fans would pay for the experience of the concert, in addition to paying for a recording of the music. He went on to create the business of rock concert promoting—booking and managing multicity tours for bands and selling lots of tickets. Those tickets were carefully rationed, a single purchaser allowed to buy only a limited number. Fans would line up at box offices, sometimes camping out the night before for popular bands.

AP Photo/Jason DeCrow

Wanting to maintain the aura of the 1960s that made rock concerts accessible to all their fans, many top bands choose to price their tickets below the market equilibrium level. For example, in 2009 Bruce Springsteen sold tickets at his concerts in New Jersey (his home state and home to his most ardent fans) for between $65 and $95. Tickets for Springsteen concerts could have sold for far more: economists Alan Krueger and Marie Connolly analyzed a 2002 Springsteen concert for which every ticket sold for $75 and concluded that The Boss forfeited about $4 million by not charging the market price, about $280 at the time.

So what was The Boss thinking? Cheap tickets can ensure that a concert sells out, making it a better experience for both band and audience. But it is believed that other factors are at work—that cheap tickets are a way for a band to reward fans’ loyalty as well as a means to seem more “authentic” and less commercial. As Bruce Springsteen has said, “In some fashion, I help people hold on to their own humanity—if I’m doing my job right.”

But the rise of the Internet has made things much more complicated. Now, rather than line up for tickets at the venue, fans buy tickets online, either from a direct seller like Ticketmaster (which obtains tickets directly from the concert producer) or a reseller like StubHub or TicketsNow. Resellers (otherwise known as scalpers) can—and do—make lots of money by scooping up large numbers of tickets at the box office price and reselling them at the market price. StubHub, for example, made $1 billion in the resale market for tickets in 2010.

This practice has infuriated fans as well as the bands. But resellers have cast the issue as one of the freedom to dispose of one’s ticket as one chooses. In recent years, both sides—bands and their fans versus ticket resellers—have been lobbying government officials to shape ticket-reselling laws to their advantage.

Questions for Thought

Question

1. Using the concepts of consumer surplus and producer surplus, draw a diagram to illustrate the exchange between The Boss and his fans. Explain your findings. (Hint: ticket supply is perfectly inelastic.)

Using the concepts of consumer surplus and producer surplus, draw a diagram to illustrate the exchange between The Boss and his fans. Explain your findings. (Hint: ticket supply is perfectly inelastic.)

Question

2. How has the rise of Internet resellers changed the allocation of surplus between The Boss and his fans?

How has the rise of Internet resellers changed the allocation of surplus between The Boss and his fans?

Question

3. Using your diagram from the the first question, explain the effect of resellers on the allocation of consumer surplus and producer surplus in the market for concert tickets. What are the implications of the Internet for all such exchanges?

Using your diagram from the the first question, explain the effect of resellers on the allocation of consumer surplus and producer surplus in the market for concert tickets. What are the implications of the Internet for all such exchanges?