If a ticketing agency wished to maximize its profits, it could simply
raise prices across the board to a point higher than is now typically
charged. This would take the revenue that the secondary market gets.
For many such events, customers would stay away in droves. Prices would
then be reduced until the customers come back. This is the way the
market clearing price is supposed to be arise, but in the real world it
hardly ever works that way. Why?
It has been supposed that price discrimination would be required for a
ticketing agency to maximize its profits in this way. The ticketing
agency would charge each customer a different price. Imperfect
information prevents the ticketing agency from reaping these potential
profits. Only the secondary market, with its street relationships, can
reap these profits. On the contrary, however, an across the board price
increase could serve much the same purpose: raising prices to the
market clearing level in order to take the profits that the secondary
market currently receives.
Suppose that price discrimination would be required. Is price
discrimination illegal? That would preserve the maximization
assumption. In U.S. federal law, the Robinson-Patman Act prohibits some
forms of price discrimination. This law applies only to commodities,
however, not services such as event tickets. If a ticketing company
could figure out how to adjust their price for each individual based on
their ability to pay, there would be no legal reason for not so doing.
This could annoy customers, but the ticketing agency would not break
the (federal) law in so doing.
(We should distinguish price fixing, which is not at play in this
discussion. When two competitors in the same market agree to set prices
to a particular level, obviously at a price that increases their
respective revenue streams, that is price fixing. Price fixing is
illegal under the Sherman Antitrust Act.)
Perfect information as to individual willingness to pay is not
available to a ticketing agency, or almost any enterprise for that
matter. Nevertheless, an across the board price increase would serve to
neatly reap the profits of the secondary market. So again, why doesn't
a ticketing agency raise prices to the market clearing level?
Perhaps the assumption that enterprises wish to maximize their profits
is out of sync with reality. A more realistic assumption, drawing from
my experience, albeit limited, in the business world, is that
enterprises only wish to receive what they perceive to be a reasonable
return on their investment.
Andrew Hagen
[EMAIL PROTECTED]
On Tue, 20 Mar 2001 09:16:54 -0500, Brown, Martin (NCI) wrote:
>Nonsense. The higher price paid by and to scalpers reflects price
>discrimination. It is only the few hardcore fans or people who need to buy
>tickets on short notice that are willing pay the higher price. In theory,
>ticket agencies could also reap these extra profits by charging a different
>price to every consumer according to indvidual willingness-to-pay, but - 1]
>blatant price discrimination is illegal, 2] they lack the informational
>mechanisim to determine individual willingness to pay. Scalpers are able to
>determine the latter through the extra-legal channel of selling hot tickets
>at the venue where those with the highest willingness to pay are likely to
>show up. This is so Econ 1 it is hard to believe your professor is serious.
>But this probably only reflects the poverty of academic economics when it
>comes to even elementary considerations of real market behavior.
>
>By the way, I wouldn't be surprised is ticket agencies aren't trying to
>figure out ways to increase their ability to exercise price discrimination
>by collecting or purchasing information on individual performance tastes via
>internet consumer surveys.
>
>-----Original Message-----
>From: Andrew Hagen [mailto:[EMAIL PROTECTED]]
>Sent: Monday, March 19, 2001 7:34 PM
>To: [EMAIL PROTECTED]
>Subject: [PEN-L:9166] maximization?
>
>
>A professor of mine started class today with an interesting question:
>why don't ticketing companies raise prices to the level that the market
>will bear? Often these companies hold a monopoly in selling tickets to
>all events at a particular venue. Currently the event ticket market can
>bear higher prices, as evinced by the higher prices paid to scalpers,
>AKA the secondary market. It's apparent that raising prices would
>maximize profits in the primary ticket market. Why don't they do so? My
>professor's proposed answer was: companies do not want to maximize
>their profits; they only want what they perceive as a reasonable return
>on their investment. It seems to me like a plausible assertion.
>
>Could someone point me toward an article or book that questions the
>maximization assumption?
>
>Thanks,
>
>Andrew Hagen
>[EMAIL PROTECTED]
>
>
