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Regulation of Secondary Ticketing in the Entertainment Market

In: Business and Management

Submitted By marcovava
Words 5136
Pages 21
ABSTRACT This paper aims to describe the particular market for ticket events and analyse the evolution of some regulatory and non-regulatory solutions developed to control the expansion of secondary ticketing and ticket-scalping practices and, in particular, it tries to investigate how the increasing adoption of internet as a re-selling channel is imposing big changes in the legislation and how all this is challenging the old approach of regulators to this specific market. The paper, supported by some theoretical economic considerations, also tries to establish whether ticket re-selling practices create significant problems to consumers or other involved players and explores the welfare effects, cost and effectiveness of regulatory and non-regulatory decisions on promoters, ticket-scalpers and consumers.

__________________________________ INTRODUCTION
Scalping is defined as ‘the practice of selling some-thing (in our case tickets) at a price above face value once it becomes scarce (usually just before a high-demand event begins)’ (Black-Law Dictionary).
For decades, ticket scalping has been considered a controversial activity, and many anti-scalping laws have been developed and suggested from many different countries in order to try to reduce and regulate the practice of re-selling tickets and the subsequent emergence of a secondary market for tickets. What it is noticeable is that this widespread hostility toward ticket scalping seems in open contrast with the conventional principle of economy in free market, which demonstrates that the existence of a secondary market results in a more efficient allocation of scarce resources and therefore may increase the overall social welfare.
Moreover, the recent adoption of Internet and other new re-selling channels has deeply modified the way in which second ticketing market operates.
These aspects are challenging the entire regulatory mechanism developed so far, and today the real question is no more on how to regulate re-selling practice, but if regulation is still useful in ensuring welfare improvement to consumers, if it is possible to balance costs and benefits of regulation and which are the possible non-regulatory alternatives in the event of a de-regulation process.

This paper will go through different points: in the first part a theoretical introduction presents the overall structure of the market for event tickets, the main players involved, the relationship between primary and secondary market and the economic reasons for the existence of a secondary market.
The second part provides some general economic considerations to better understand the dynamics that characterize this kind of market.
The third part offers a deep analysis on advantages and disadvantages related to the existence of a secondary market for consumers and promoters. This part results particularly important to understand the effects of secondary ticketing on the overall welfare and to define whether regulation is still useful or not nowadays.
The fourth and the fifth parts tries to define the evolution of regulatory and non-regulatory measures developed from the very first anti-scalping regulation (published in New York, 1922) to the recent de-regulation hypothesis and applications due to the expansion of the secondary market and increase in competition thanks to new and easier re-selling channels like web-based auctions and internet re-selling platforms.
The paper finish with some personal opinions and conclusions. 1. THE MARKET FOR TICKET EVENTS
1.1. THE PRIMARY AND SECONDARY TICKET MARKET
The market for ticket events can be divided into two sub-categories: the ‘primary market’, in which tickets are originally sold at their face value, and the ‘secondary market’, where tickets from the primary market are resold, usually at a higher price.
Tickets on the primary market can be sold by the performer, the event promoter or through an authorised ticket agent (like Vivaticket, Geticket and Ticketmaster) usually over the phone, at dedicated box office or online. In the secondary market tickets previously purchased on the primary market are resold, usually by brokers, professional resellers and unauthorized / illegal resellers.
1.2. THE MAIN PLAYERS INVOLVED IN THE PRIMARY AND SECONDARY MARKET
The main players involved in the market for ticket events are:
1. Event organizers and producers is the group of persons organizing the event, determining ticket pricing strategies and gaining an important part of the revenues obtained by selling tickets on the primary market. (e.g. Hits and Jams Entertainment, Curfew Entertainment, …)
2. Primary sellers and event promoters: These functions with the goal of promoting and selling tickets for the event in the primary market can be covered by the event organizers or outsourced to agencies selling tickets. (e.g. Vivaticket, Geticket, Ticketmaster, …)
3. Consumers: Consumers may have different roles considering different markets, they purchase tickets on the primary market, and can decide to re-sell them or buy more tickets on the secondary market in case of changes in their plans or for scalping purposes.
4. Professional resellers and brokers are persons that purchase tickets on the primary market with the specific aim of re-selling them at a higher price. It is important to notice that, acting in this way, they assume a degree of risk (in the event of not being able to earn money or even to re-sell tickets) which would otherwise be borne by the original seller in the primary market
5. Intermediaries and facilitators are intermediaries that facilitate the re-sale activity by matching buyers and sellers and making the transaction more efficient, by offering more transparency and sometimes also refunding warranty for specific clauses. (e.g. TicketBis, SeatWave, Viagogo, …)
1.3. THE REASONS FOR THE EMERGENCE OF A SECONDARY MARKET AND ITS RELATIONS WITH THE PRIMARY MARKET
The fact that some customers are willing to purchase tickets on a secondary market - usually

paying more than the face value offered on the primary market- implies the existence of “trade gains” that the primary market was not able to offer.
Therefore, from an economic point of view, the emergence of a secondary market has the chance to improve the overall welfare and to solve allocation inefficiencies in the primary market.
The economic literature on this topic suggests that the main determinants of the secondary market and of tickets re-sale activity may arise for a number of different reasons which include underpricing of tickets in the primary market, advanced ticket sales and sold-out resale opportunity, transaction costs perceived by customers and methods of distribution by promoters and sponsors. Here is a more detailed analysis on some of these factors:
1. Underpricing of primary tickets:
Tickets are underpriced when event organizers or promoters -intentionally or not- set the ticket price below what market demand is actually willing to pay. Tickets in the primary market might be underpriced for many different reasons, including the following:
• to lower risks related to the uncertainty over initial sales rather than bearing possible risks associated with overpricing;
• to “sell-out” events, obtaining positive publicity and generating reliable revenues with complementary goods such as television rights, records, merchandise sales, sponsorship, food & beverage sales, etc.;
• to maximize long-term revenues by retaining the loyalty of existing fans, increasing the fan base and giving incentives to “genuine fans” to attend the event at affordable prices;
2. Advanced ticket sales for high-demand events:
Advanced ticket sales occur when promoters make tickets available very early on the primary market, forcing customers to plan ahead and purchase tickets weeks or even months before the event.
Its quite obvious that ticket re-selling will be inevitable when there are advanced ticket sales for high demand-events and there is pressure from fans to keep prices affordable.
3. Transaction cost vs. Premium cost:
For high-demand events the sales of tickets on the primary market is usually associated with very high transaction costs (e.g. standing in a queue for long hours, early morning online selling, long-time planning, etc.). In these situations, consumers may decide that the premium cost that has to be paid in the secondary market is lower compared to the transaction costs required on the primary market.
4. Unexpected changes in consumers plans:
Unexpected circumstances or changes in plans may force consumers to be unable to attend events for which tickets have already been bought;
5. Low variety in quality/pricing ratio:
Tickets sold on the primary market are usually sold at price ranges that usually do not entirely match the actual degree of variety in seats quality, leading to a lack in price differentiation.
Some consumers may give different value to seats sold at the same price on the primary market and may be willing to pay a premium on the secondary market in order to chose specific seats and not only the generic area for the price range offered on the primary market.
6. Distribution methods by promoters and sponsors:
Distribution methods adopted by event promoters and sponsors in the primary market may also induce to ticket re-selling activity.
For example for some events, especially sport events, significant number of tickets are offered (for free or at a special price) to those related with the match, such as sponsors, club members, licensees journalists and reporters, which may decide to offer them on the second market in case they cannot attend the event.
2. ECONOMIC ANALYSIS
Given the empirical evidence on the overall market, it is now important to better define the issue with some theoretical economic considerations.
2.1. MARKET FAILURE AND MARKET CLEARING DEFINITIONS
As already stated in the introduction, the theoretical approach considers the emergence of a secondary market as the failure to achieve the efficient allocation of scarce resources on the primary market.
Therefore, secondary market is seen as the obvious consequence of the welfare-maximizing process typical of a free-market economy in the presence of a ‘market failure’. In relation to our case, a market failure may arise from information asymmetry between consumers and sellers, for example when tickets are allocated inefficiently, without considering the real value given to them by potential consumers or when consumers lack adequate information about the actual quality of the ticket offered, such as viewing location or other related features.
The secondary market operates according to the economic principle of ‘market clearing’, in which market generates price movements to balance the demand for tickets with tickets actually supplied. In fact the excess demand for a scarce good on the primary market leads to the natural emergence of a secondary market that allows the market itself to be cleared in the most efficient way possible.
Moreover, it is important to notice how the recent adoption of Internet as a selling-channel has further reduced the difficulty for re-sellers and consumers to find each other and efficiently match supply with demand.

2.2. MARGINAL COST OF SEATS IN ‘ON-SALE’ AND ‘SOLD-OUT’ SITUATIONS
Another particular feature of the market for ticket events is the fact that the cost of producing a live event, once planned, depends very little on the actual number of tickets sold. When tickets are still available and ‘on-sale’ it costs virtually nothing to fill an otherwise empty seat.
However, the number of seats is usually fixed, so once the event is ‘sold-out’, the cost of adding one more access immediately tend to infinite. In economic terms, once an event is planned, the marginal cost for each seat is virtually zero until the selling-out of all the tickets brings the marginal cost of additional seats close to infinite. Revenue from tickets has therefore an upper limit related to the ground-event capacity, and the market clearing price will depend only on the demand for the tickets.
2.3. ALLOCATIVE EFFICIENCY OF A SECONDARY MARKET
An important aspect to be considered is the fact that secondary ticketing results in a redistribution of scarce resources when tickets are purchased by consumers who are willing to pay a premium to secure a seat. This suggests that usually efficiency is increased by channeling tickets to consumers who value them the most. Therefore ticket holders who value the ticket less will agree to sell to the higher valuing users in a mutually beneficial transaction. The transactions will go on until the total of the highest-valuing users is in possess of the tickets. Allocative efficiency works through this re-allocation of tickets, in which higher quality seats are assigned to consumers with higher willingness to pay. Therefore, from an economic point of view, the secondary re-sellers operate as an intermediary locating willing buyers and gaining some of the surplus for providing this service.
2.4. INFORMATION ASYMMETRY ON THE SECONDARY MARKET
Information asymmetry arises when knowledge between buyers and sellers is not balanced. Concerning the secondary ticket market, re-sellers usually have better information than consumers about the quality and authenticity of the tickets, such as information on seat location, how the tickets were originally obtained, whether the seller is an authorized distributor, etc.
Information asymmetry can lead to problems with consumer that cannot be certain about quality and authenticity and may also be deceived with counterfeit tickets.
2.5. MARKET DISTORTION AND ARTIFICIAL SCARCITY OF TICKETS
Unauthorized re-sellers who manage to obtain large quantities of tickets on the primary market may induce a market distortion creating artificial scarcity for high-demand tickets and thereby pushing up prices. To this end, ticket re-selling increases the transaction costs for consumers, such as time, effort and price, by increasing competition for tickets.
3. WELFARE ANALYSIS
Now that the overall structure of the market for ticket events has been defined, and the main economic theories concerning the topic has been mentioned, the focus is now on the effects that the secondary market has on the players involved in it, and in particular on consumers and organizers. It is interesting to notice that there is not a general consensus from academics on this specific point. In fact secondary ticketing has both positive and negative effects on the market, giving advantages as well as disadvantages to any of the players involved.
3.1. WELFARE EFFECTS ON CONSUMERS
One of the major reasons that led over the years to the development of many regulatory standards to control the secondary market for tickets is the constant attempt to protect consumer rights and to improve their overall welfare. Nowadays, despite some negative effects are still present, new sales channels such as internet platforms can also ensure considerable benefits, to the point that it is no longer possible to say with certainty which effect prevail and how these effects balance each other within the overall market structure.
Consumers may experience detriment and may feel dissatisfaction when they have to pay higher prices for tickets or even not being able to attend the event if they are not used to the ‘unwritten rules’ of the secondary market. Moreover, the inflated prices and shortage of tickets caused by re-sellers buying up large quantities of tickets cause fans to be unable to attend the event because there are no tickets left or because they have been ‘priced out’ of the market. Consumer detriment may also arise when consumers purchase secondary tickets which are counterfeit, non-transferable or that may results worthless in case of not-planned cancellation or postponement of the event by the organizers.
Risk of purchasing from unauthorized agents and illegal sellers and incur into illegality. Consumers may find it difficult to identify whether they are purchasing tickets from an authorized secondary agent, such as a licensed ticket broker. Organizers may also decide to withdraw original tickets if they have evidence to prove that tickets have been sold in breach of their terms and conditions.
As we said, there may also be numbers of benefits for consumers, such as the chance to purchase tickets after the release date or the possibility to resell or transfer tickets if unable to attend the event. In fact if the secondary market works efficiently and consumers are fully aware of the price-premium they are paying, they can use this information to make a fully informed decision about whether or not to purchase a secondary ticket. With this transparency, consumer detriment and dissatisfaction can be reduced since consumers are better informed before making a choice.
The purchase of a secondary ticket is a form of consumer transaction with the consumer purchasing a good from a seller at a mutually agreed price. The price is often greater than the face value of a ticket to reflect the fact that demand exceeds supply. Re-sellers can provide high-demand tickets for sold‑out events to consumers that were not able to secure a seat in the primary market and are willing to pay a premium in order to attend. To this end, the secondary market is providing a service in terms of seat availability and flexibility to consumers.
Secondary tickets allow consumers who are willing to pay a premium to attend events without having to plan ahead or to wait in line for tickets. Some consumers choose either between queuing for a ticket (physically, online or over the phone) which requires advanced planning and may not allow them to secure the most desirable seats, or alternatively, leaving their purchase till later and paying a premium price to re-sellers in the secondary market.
Therefore we may assume that secondary market provides a service as time and convenience brokers for those consumers who have a high opportunity cost of time and would prefer to pay more rather than spend time to secure a seat.
Advanced technologies, such as Internet, online auction sites and smartphones applications have also made it easier for consumers to find and compare tickets in the secondary market, making easier and safer the entire transaction procedure.
Another benefit provided by the secondary market is the fact that it offers consumers who are unable to attend an event or no longer want to attend an event, the opportunity to re-sell or transfer their tickets. Also in this case the presence of online sales and auction sites on the Internet gives the opportunity to individuals to enter the secondary market on a one‑off to sell tickets they are unable to use.
3.2. WELFARE EFFECTS ON ORGANIZERS AND PROMOTERS
Effects of the impact on welfare induced by the existence of a secondary market are also visible on the event organizers and promoters, but -again- both positive and negative effects must be considered and evaluated before taking any decision on if and how this market should be regulated. While secondary ticketing has been attributed to the interaction some not-better-defined ‘economic forces’, it does result in revenue being diverted away from performers, organizers and promoters, and towards brokers and secondary market re-sellers. This induce detriment in organizers who bear the risk to organize and promote the event and see a part of revenues flowing towards re-sellers not directly involved in the event. As we already said, inflated prices may price some fans out of the market. This may also result in poor publicity for performers and organizers as fans feel discontent with them, because they have to pay inflated prices for tickets.
From the organizers’ point of view, secondary market may also have some benefit effects. It is important to understand how some of the decisions made by the organizers and promoters may stimulate the practice of secondary ticketing. For promoters, charging lower ticket prices to ensure a certain level of revenue is traded off against potentially higher revenue but with the associated increased risk of not being able to sell out the event. Therefore Re-sellers and brokers may helps in quickly sell out the event, giving positive publicity to the event, taking the risks of re-sell them trying to extract some extra profit.
4. REGULATORY MEASURES
The challenge for regulatory and non-regulatory measures in this market is to balance fair access to tickets for consumers, with the desire of organizers to control pricing while capturing the maximum of the potential revenue. Despite the long history of attempts to control secondary ticketing, there has never been a general consensus that this re-selling practice is a problem worthy of legislative and regulatory concerns. Also the academics may come to different conclusions whether they focus their analysis on old concepts, recent dynamics or forecast on future possible evolutions of this fast-growing market.
While some argue that a ticket should be able to be bought, passed on, transferred or resold like any other consumer good, the alternative view is that a ticket is not a tradable commodity but evidence of a contract between the promoter and the original ticket purchaser. Some theorize the possible advantages of de-regulation and the subsequent increasing in competition in the secondary market, others would rather increase more complicated regulatory measures in the name of consumers welfare. Etc.
Regarding this theme, it is interesting to read and compare the evolution of concepts and definitions in academic papers: the old view is well summarized by J.D.Tishler in its paper “Ticket scalping: an economic analysis and proposed solutions” (Santa Clara Law Review, 1993) in which he states that “scalpers (and re-sellers) are pure parasites on the ticket market. They unfairly remove tickets from the legitimate distribution sites and raise prices to whatever the market will bear. Scalpers merely extract consumer surplus without performing any service which would merit the profit”.
Exactly ten years later (2003), in its paper “How pricing strategies affect the resale of tickets”, P.Courty states that "brokers (and re-sellers) provide a service: availability in the late market. They help the promoter price discriminate and it is possible that the promoter ends up selling more tickets with the presence of brokers" showing some of the benefits from the re-selling practice. Other papers, even more recent, are also developing the concept of de-regulation of the market to gain a higher overall surplus for all the parties involved and to incentive the evolution of a more transparent and efficient secondary market. A further demonstration of this uncertainty in evaluating benefits and concerns related to the second market is the extremely variegated international situation on the regulation issue for secondary market.
4.1. US REGULATION APPROACH
One of the most evident example of variety in regulation measures adopted to control the secondary market is the US state-based approach. State-level regulations in US date back at least as far New York’s 1922 anti-ticket scalping statute. Today laws regulating scalping activity are quite heterogeneous, but five main categories defining the general legislation approach have been identified:
• Resale of tickets above face value completely restricted;
• Licensed resellers with restricted markups on the 50% of the face value of the ticket;
• Licensed resellers with unrestricted markups;
• Resale restricted at event site;
• No regulation;
What is noticeable, anyhow, is the fact that in the last 5 years there have been a general trend to remove –or at least reduce- legislation relating to secondary ticket, and re-selling/scalping is now legal in 45 states. For example, until recently, New York imposed a cap on the resale price of tickets of 4 percent above face value for venues with more than 6000 seats, and 25 percent above face value for smaller venues. In 2007, the price cap was abolished and ticket conditions which restrict the resale price and method of resale of tickets were also prohibited.
One of the main reason of this deep change is related to the recent adoption of Internet as a re-selling channel: today a huge secondary market for tickets operates through websites such as eBay, SeatWave, Ticketbis, Viagogo, worldticketshop, etc. and many individuals who would not have stood on a street corner to scalp tickets, now make money out of reselling small blocs of tickets.
Another argument that was made is the fact that, if all ticket reselling was legal, an increase in the number of legal resellers would increase competition and prices for the consumer would fall.
Moreover, a growing number of sporting teams, theatres and promoters had begun entering the secondary ticket market themselves, realizing the potential of a multi-billion dollar market and asking governments to reduce anti-scalping regulations.
Also internationally may be found a variety of regulatory responses to secondary ticket. Some of these are outlined in the following paragraph:
4.2. INTERNATIONAL REGULATION APPROACH
1. Australia
In Australia, generic consumer protection laws as the Trade Practices Act 1974 provide the overarching framework for protecting consumers when they purchase goods and services. Additionally, there are some activity‑specific laws to regulate ticket re-selling in some circumstances.

Major Sporting Events Act 2009
Event organizer must submit a ticketing scheme to the Minister for approval. Once a scheme has been declared by the Minister, it is an offence to sell tickets otherwise than in compliance with the scheme or in breach of a ticket condition prohibiting sale by unauthorized persons.
Major Sports Facilities Act 2001
“It is an offence to sell or buy tickets to events held at eight specified Stadiums Queensland venues for a price which is more than 10 per cent above the original ticket price.”
Motor Racing Events Regulation 2003
“A person must not sell anything in an area declared for the staging of a motor racing event during the declared period.”
2. New Zealand
New Zealand’s Major Events Management Act 2007 prohibits tickets being resold for more than the original price plus costs. This applies to ‘approved’ events of international significance. For minor events anti-scalping laws have been recently removed.
3. Canada
In Canada, the Competition Act allows the Competition Tribunal to make an order prohibiting a person from directly or indirectly: - influencing upwards, or discouraging the reduction of, the price for resale, supply, offers to supply or advertises a product within Canada; or - refusing to supply or otherwise discriminating against any person engaged in business in Canada because of the low pricing policy of that other person; where the conduct has had, is having or is likely to have an adverse effect on competition.
4. United Kingdom
The Society of Ticket Agents and Retailers (STAR) developed with the UK Office of Fair Trading an industry standard code of practice. The Code aims to: •promote confidence in the public who purchase from signatories; •distinguish agents from touters who charge extortionate elevated prices; •promote public perception of ticket agents; and •self‑regulate to promote high standards of service.
It also sets out standards and procedures for dealing with the public, complaints and breaches.
5. European Union
In 2009, aware of the highlighted advantages for consumers, the DCMS (Europe Economics for the Department of Culture, Media and Sport) has stated that it does not wish to legislate further against secondary ticket retailing. However, the Government decided to provide guidance with the goal to spread knowledge on the topic and to ensure that consumers are reasonably protected.
The European Committee considered more generally that the situation whereby large profits could be made on the secondary market with no benefit to the organizers or owners of the primary rights was unfair and needed to be addressed.
However, it shared the view of the Government that a voluntary (non-regulatory) solution was preferable to statutory regulation and that intervention by Government should be considered only as a last resort and only where there is clear evidence that it would be in the public interest. New regulation and the associated cost of enforcement were likely to impose greater burdens and restrictions on consumer choice than market-led, non-regulatory solutions. Therefore, as the market is being de-regulated or reduced in legislation in a wide part of the developed world, non-regulatory measures started appearing and being developed form organizers and primary promoters to protect their interests. Chapter five outlines some of the recent solutions.
5. NON-REGULATORY MEASURES
In response to the recent de-regulation decisions of many developed country, and considering the desire of organizers, promoters, artists and sport clubs to capture revenue currently flowing into the secondary market, some event organizers have developed a range of ticketing solutions aimed at preventing opportunities for scalping and re-selling. One effective way to reduce secondary ticketing is to prevent tickets from getting into the hands of scalpers by managing ticket distributions procedures. Examples of such management practices are: • staggering the release of tickets to encourage consumers to wait and buy tickets from authorized sellers at face value; • delaying the release of tickets to reduce opportunities for re-selling to occur before the event; • placing limits on the number of tickets that can be bought by any one person (e.g. no more than two per person); • allowing tickets to be returned to the organizer for a refund; • requiring the original purchaser’s name to be printed on tickets and checked against photo identification upon entry; and • improving the supervision of official ticket outlets.
Another recent development in ticketing is the adoption of virtual tickets. These are increasingly being used in the United States, and appear to make re-selling impractical.
With virtual tickets, no physical tickets are issued. Ticket holders simply swipe their credit card or driver’s license when they enter the venue. If they want to resell their tickets, they must go to a dedicated website, where they can sell them for whatever mark-up is allowed by the event organizer. The event organizer then cancels the virtual ticket and issues a new one to the purchaser.
It is noticeable also the initiative of the Music Managers Forum to seek agreement for a voluntary scheme under which sellers of tickets in the secondary market would pay a proportion of the profit to the original organizers. This money would then be shared between organizers of events and artistes, in the same way as the original amount paid. In return the organizers would recognize the legitimacy of the secondary seller.

6. CONCLUSIONS

Regulation of secondary ticketing in the entertainment market definitely leads to many complex issues.
In this paper we analyzed the ticket market under an economic and welfare perspective, but without any chance to determine with certainty whether the existence of a secondary market brings more benefits or concerns to the players involved. Only one thing can be stated with certainty, the fact that the secondary market will continuously expand through Internet-based platforms becoming more and more complex, and that laws against scalping will lose effectiveness and will require higher investments and costs. De-regulation seems doubtless the most efficient solution. In this scenario, expanding competition in the secondary market would allow prices to be lower, and should also increase the overall welfare of the players involved. Of course organizers and promoters will remain the least protected by the law, but working on non-regulatory solutions will ensure them to obtain an effectiveness equal -if not greater- than that guaranteed by regulation principles.…...

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