Why Is There A Secondary Ticket Market?

The secondary ticket market is worth an estimated $10 billion. That's one trillion pennies being tossed into the dark, murky wishing well of ticket scalping and ticket brokerage. Clearly the market exists, but why?

The short answer is that usually, the demand for tickets at face value is far greater than the supply of those tickets. On the other hand, people who buy tickets with the intention of reselling them create an open market where the value of the tickets is more closely determined by the demand for them.

For a more thorough explanation, let's identify the parties involved, and explain their roles and motivations:

A producer is the official source for tickets to a given event. This entity sets the face value for the tickets, controls the number of tickets released to the public, and may make restrictions on how many tickets one person can purchase.

A broker is an entity that believes the face value of a ticket to be far less than the ticket is "worth." In this case, the "worth" of the ticket is the highest price at which a ticket will sell. The broker buys the tickets at face value with the intention of reselling them at a higher price.

Let's suppose a Billy Joel concert at Madison Square Garden is announced two months in advance. The producer of the show sets the face value of the tickets at $50. There are 50,000 seats in Madison Square Garden, but 500,000 people want to buy tickets to the concert at $50. When the tickets go on sale, there is a rush to get tickets, and the first 50,000 people get them. Everyone else is out of luck, right?

No. Some of the 50,000 ticket holders are Brokers. They believe that, of the 450,000 people who were too late to buy a ticket at $50, some of them will be willing to pay $100 for a ticket. If they are right, they claim a $50 profit on each ticket.

So why doesn't the producer simply assign the ticket a higher face value? The producer has to cover the costs of the production, which include venue rental, performer payments, and advertising spending. In order to make a reasonable profit, the producer wants to make sure that all of the tickets are sold. By making the face value of tickets lower than the market value, the producers insure that demand is greater than supply and all of the tickets sell. Since concession and souvenir sales are a large revenue source for producers, they err on the side of a lower face value to make certain they have the most people possible at the venue.

This conservative pricing scheme by producers creates an opportunity for brokers to buy the tickets at face value and resell them for profit. Brokers take a risk, in that the actual value of the ticket in the open market may be more or less than the face value. If the market value is higher, the broker makes a profit. If the market value is lower, the broker loses money. So what are the benefits of having Brokers?

When tickets go on sale months before a show, it's difficult for potential buyers to plan so far in advance. When all of the tickets are sold in the first few hours, brokers provide a way for people to buy tickets closer to the event, albeit for a higher price. For many people, this increase in price is worth the ability to wait until closer to the event to buy tickets.

Some economists argue that those fans willing to pay more for tickets should be allowed to buy them. That way, the most enthusiastic fans are able to attend the event. Still, many fans are upset that tickets are being bought at face value by brokers rather than true fans. Is there any way to stop that from happening?

Several models have been put forward to combat ticket brokerage, but none are feasible. The only way to insure that the buyer of a ticket uses it to attend the event, rather than reselling it, is to make the buyer enter the venue immediately upon purchase. Usually, this is logistically impossible, as it doesn't allow for fans to order tickets in advance of an event or at any location besides the venue of the event.

From a consumer's point of view, the best situation exists when there is a balance between having some tickets available from producers at face value when they go on sale, and some tickets available from brokers at market prices closer to the show. That way, true fans have the choice of waiting in line to get their tickets early or paying a little extra to get them just in time for the show.