Why do bands allow scalpers? (Hint: Dynamic Efficiency)

Mankiw recently posted about ticket prices and scalpers, and this reminded me that a while ago I thought of a reason why performers might allow some people to make so much money in their stead. It works more for music groups and football teams, but is more relevant for theater performances.

Say you are a music band who has just had a string of hits. You have two options: sell concert tickets for $60, in which case about half of them will go to lucky fans who have been following you since yours early days, and half will go to scalpers who will resell them for $500 to wall street traders that will use them to impress their dates. Or you can sell all of them for $400, and they will all go to wall street types.

It seems a no brainer, but what happens if the next album flops? In the first case, the guys that followed the band from the garage days will still go to the concerts to hear the old songs, and maybe your next effort has a better reception. Even if you never have another hit, you can probably spend the next 30 years playing 500 seat venues. But if you sold all the tickets for $400, your long run fans can't come to your concert for a long time and lose interest. If you ever release a dud, the wall street guys will move on to the next new hot thing and you're out of a career.

Perhaps from a strictly monetary perspective, the smart NPV maximizing thing to do would be to take the easy money and run, but if a musician actually likes performing in front of audiences it is better to nurture your long term fan base, even if it results in a lot of money going to scalpers.

A better solution would be to create some sort of loyalty club where the price per ticket would depend on how many concerts you have seen, perhaps with earlier performances leading to bigger discounts. Clearly the guy tearing tickets would have to also check the photo ID of anybody who shows up with a loyalty-discounted ticket, or something along those lines.

Could be a fun topic for one of my thesis students ("do bands that sell cheaper tickets have longer careers?").


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