You Don’t Count the Cost

David Stokes has been doing a fine job covering the potential legalization of ticket scalping. There’s no question legalization is a good idea here, both for sellers and consumers. There are also some other economic points to consider.

The price of an item isn’t just what you pay for it in cash. The true price, to you, of a bag of groceries includes things like driving to the store, time spent browsing the shelves, waiting in line, effort expended pushing the cart, etc. The more difficult it is to get the thing you’re buying, the higher the real cost — regardless of what it says on the price tag.

Ticket-scalping policies are usually adopted out of a desire to keep prices down. If scalpers buy all the tickets for an event at face value, then turn around and sell them at a high markup, consumers are worse-off, right?

Not quite.

The real price of a consumer good is just a measurement — an intersection of supply and demand. If a baseball team sets the price of its tickets much lower than the real price that the market will bear, it hasn’t made the extra cost vanish. The team has simply shifted the cost in some way, perhaps by giving people an incentive to camp out all night in the rain so they can be first in line. The time and effort spent waiting in line is all part of the price of the ticket.

There was an excellent example of this sort of cost (which I linked to earlier this month) when a county in Virginia tried to sell several iBooks at $300 below market price. The result? "Mothers clutched their children for protection, people screamed as they were knocked to the ground, a stroller was demolished, cars inched through the crowd…" Economist Alex Tabarrok noted:

You can get rid of the market but you can never get rid of competition.  Goods not allocated by market prices have to be allocated somehow and so long as goods are scarce there will be competition to obtain them, if not by outbidding competing buyers with money then by outbidding them in time spent waiting in line, doing political favors or some other method.

What happened in Henrico county is the same type of thing that happens when there is a price control.

Controlled prices rise above the nominal price tag, despite all efforts to keep them low. Tabarrok goes on to point out:

It’s very important to notice that that the shop owner gets your money but does not get your time. Thus, money expenditures are a transfer but time expenditures are a waste.

The best way for our hypothetical baseball team to keep real prices low is to sell tickets for what they think the market will bear. And the best way for politicians to keep real prices low is to get out of the way — let people trade, sell, give away, or destroy the tickets they’ve legally purchased.

Another critical point to consider is that markets for used merchandise affect the price of new merchandise. Economist David D. Friedman, in his book Hidden Order: The Economics of Everyday Life, provided an example:

Once, in the middle of a conversation with an economics editor who knew very little economics, I mentioned the resale market for textbooks. Instantly her eyes, and those of her colleagues, lit up. If there was one part of the economy they knew and hated, it was that market. Their reason was simple; every time a student bought a secondhand copy of one of their textbooks, they lost the money they would have made selling him a new copy.

I put the following question to them: Suppose an inventor walks in your door with a new product—timed ink. Print your books in timed ink and activate it when the books leave the warehouse. At the end of the school year, the pages will go blank. Students can no longer buy secondhand textbooks. Do your profits go up—or down?

Their answer was "Obviously up—we want it." Mine was "possibly down." To see why, consider a simplified version of the problem. Textbooks last two years. New textbooks sell for $30; used textbooks for $15. The cost to a student of using a textbook for a year is $15; either he buys a new one for $30 and sells it at the end of the year for $15, or he buys a used one for $15 and throws it out at the end of the year.

If the publisher switches to timed ink and keeps charging $30, he has just doubled the cost of the book to students—from $15 for a year’s use to $30?—which will surely decrease the number of students willing to buy it. If he wants to keep all his customers, he will have to cut his price in half, at which point revenue will be the same as before he adopted the new ink (twice as many books at half the price), cost will be higher (since he has to print twice as many books, in addition to paying the inventor to use his new ink), so profit will go down. He could, of course, keep his price at $30 and sell fewer books. But if that increases his profit, he would have done even better selling books without timed ink at $60, since that results in the same cost to the students and lower costs to him.

In this simple example, timed ink reduces profits. In more realistic cases the answer is more complicated. But the editor’s instant response, which simply assumed that the price you could sell a new book for was unaffected by how long it would last, was wrong. Understanding economics is useful—even to economics editors.

When you artificially restrict the after-market options for a commodity, the de facto price of that commodity rises. If I don’t have the option of selling CDs from my collection that I’ve grown tired of, or books from my collection that I’ve already read and am unlikely to revisit, I’ll probably buy fewer CDs and books in the future. So, if the after-market declines, the initial market also declines; artificial restriction of secondhand sales decreases new sales as well, because the restriction has caused the commodity to become, literally, more expensive.

This is a point lost on the recording industry when it calls for royalties on used CDs or radio play, and on author-advocacy groups who complain about used book sales on Amazon. Their concerns are misguided. A healthy market for used items will always spur new-market sales as well — because the very existence of the used market makes new items all the more valuable for consumers.

In the market for event tickets, a restriction on after-market sales hits season ticketholders especially hard. People who can’t make it to every game, or every symphony performance, are less likely to splurge for season tickets — because they can’t do what they want with the tickets they’re not planning to use. If, in addition to a restriction on scalping, ticketholders also weren’t allowed to sell their tickets at face value, or give them away, the de facto cost of season tickets would rise so substantially that the market would likely dry up unless the nominal up-front price was reduced at the same time.

In the final analysis, there’s nothing quite like economic freedom to keep real prices low.