For What It's Worth

Scalpers

Michael Rushton — Sun, 19 May 2013 20:43:10 +0000

The Observer reports that scalpers (or touts) are making a killing on tickets for the Proms: #

One unofficial online site is offering seats for the Doctor Who-themed Prom on 14 July for £500, compared with the official flat-rate price of £12. A ticket for the first night on 12 July is offered for £400, against an original value of £38. #
It is not just fans of the Proms who will be disappointed this summer. Many events in the coming months have already sold out – including the Rolling Stones’ Hyde Park concert – with the only tickets available on websites fetching way above face value. Now campaigners are calling for the government to crack down on the touts. #
Labour MP Sharon Hodgson, shadow minister for children and families, wants ticket-touting to be made illegal. “Families and music lovers are missing out on a British institution just so that a few individuals can make a fortune. The government needs to use the upcoming consumer rights bill to take action on touting and put the fans first.” #

Mark-ups like this have always presented a bit of a puzzle. There are only so many seats available. Ms Hodgson is not quite right: some families and music lovers will miss out, but others will not, and the same number of people will attend the Proms whether or not there is ticket resale. If the initial ticket price is kept low, and resale is effectively put to a stop (which can be done, but at some cost; note that airlines are very successful at ensuring only those whose names first appear on the ticket are able to fly), then tickets are allocated according to who first joined the queue. If the price is set at the maximum price that would still generate a sell-out, or if ticket resale is fully allowed, then in the end tickets are allocated according to who is willing to pay the most. The same number of people attend in each case, but it is a different group of people. #

Who benefits? Think of three groups: the concert producer, the concert attendee, and the scalpers. Suppose the cost of putting on the concert is C per person, and the value the attendee places on the concert, also known as their reservation price, the most they would be willing to pay for a ticket, is B. Then the total net value of a ticket is B minus C, and this is somehow divided between the producer, the attendee, and the scalper. If the attendee could buy a ticket at a price equal to C, the attendee gets all the net benefit, the producer gets no profit, and the scalper is shut out. If the producer could perfectly price discriminate, charging each buyer their personal reservation price, then the producer gets all the benefit B minus C, and the attendees and the scalpers get none. If the scalper buys a ticket at price P and resells it at R, then the net benefits are divided such that the producer gets P minus C, the scalper gets R minus P, and the attendee gets B minus R. #

So why do producers set a price that virtually invites ticket resale? Why not try to price discriminate as far as possible? We know that sellouts can be desirable for a number of reasons, but they must have known they could charge a higher price and still sell out. #

Some possibilities. One is that they do not mind having tickets sold at a low price and allocated by queue – it allows at least some people in who have limited means. Individuals who buy tickets often hang on to them even when resale prices rise a lot: psychologists have found that we tend to change our valuation of goods once we have them in hand, and so will only resell at a price significantly higher than what was paid in the first place. A second is suggested by Pascal Courty in this very interesting (and not too highly technical) paper from the Journal of Economic Perspectives: that scalpers are a way to facilitate the fact that buyers differ in when they want to buy tickets – there are lower income diehards who will queue early to ensure they get a ticket, and higher income busy professionals who wait until the last minute to see if they will have the time to attend, and provide the demand for scalpers tickets (after all, Doctor Who tickets are only being sold at £500 because someone is expected to be willing to buy them at that price). The use of dynamic pricing by concert producers might limit the role of ticket resale to some degree, but, for various reasons, dynamic pricing has not caught on so much in the arts. #

The economic impact of everything: a response

Michael Rushton — Thu, 16 May 2013 16:32:30 +0000

I will present a thoughful comment from my previous post in full, since it is worth addressing in depth: #

Respectfully, so what if “many, many firms will approach government with the same claims” of job creation and economic impact? So what if every living organism announces what economic benefit they bring to the universe? Whereas you see in it something bad, mendacious or even destructive, I would argue that this is precisely one of the kinds of information we want. Note my use of the words: “one of the kinds.” It should never be only metric by which we value, for example, the arts. But surely it should be one of them. To reject it, as you suggest in your final graph, is to knowingly amputate a good argument for the arts’ existence. #
Last time I checked, we live in an era in which threatening proportions of the population fervently believe that all things government-related are suspect, injurious, horrid, ridiculous. I say let’s have as much sunshine as possible regarding what tax breaks and incentives our government (or the UK government) gives corporations and then let’s do something directly addressing your assertion about the “false promise of economic impact studies”: let’s make the recipients of such civic largesse prove they really did create those jobs, really did drive that fiscal activity, really did generate that kind of difference to our society. If they did, why shouldn’t we know? If they didn’t — if the numbers are lies — why shouldn’t we know that, too? #
Your post implies the opposite — that we should “reject” economic impact studies, assume they’re inherently flawed, propagandistic, products of wild, vivid imaginations or simply full of lies. I don’t believe all are flawed or made of spin or conjured from whole cloth or made of Pinocchio-worthy whoppers. To “reject this method of analysis,” as you call it, is really to play the ostrich when what we need is better reporting and better facts. #
Economic impact is real. It is quantifiable. It is not, and it shouldn’t be, the only method of analysis available to us, in or out of the arts. But to “reject” a method entirely — to characterize economic impact studies as the 21st century equivalent of Piltdown Man — makes no sense to me at all. #

Let’s focus on the single issue of how to deal with this method if every sector is claiming economic impact. In other words, for the sake of this post assume that the economic impact studies of various sectors that have commissioned them are generating accurate numbers. #

There is a real cost to the economy in gathering tax revenue, over and above the amounts collected. When the government taxes earnings from work or savings and investment, it discourages those activities. We may have anecdotes about people who would not adjust their career decisions or number of hours worked or amounts of savings based on tax changes, but the empirical evidence is overwhelming that in aggregate the economy does respond. Economists refer to the losses from taxing work and saving as deadweight loss. This doesn’t mean taxes are bad – there are valuable things government does that need to be paid for, and the benefits we receive from them more than compensate the deadweight losses of taxation. So this is not an anti-government position, or a call for minimal government, and I agree with the commenter that we must resist those who see everything the state does as a waste of money. #

Now, suppose the government recognized that every sector has an economic impact. And so it would give grants to firms, nonprofit and commercial, in every sector as a consequence. We would all be poorer for it. We would experience the deadweight losses of taxation all so that the government could take that money and transfer it right back into the economy. As an analogy, suppose we adopted a policy of one day taking our loose change and moving it from our right pocket to our left, and the following day moving it back again, and endlessly repeating, but that each time we do this we spill some change on to the ground where it is lost. We would simply become worse off. The true economic impact would be negative. #

The reason for giving a grant to a specific firm, or a sector of the economy, needs to rest on something other than economic impact. There must be something that makes the sector different from the others in terms of its public benefit, that makes it worthy of support. And this is the problem with the arts using economic impact studies, where the whole point is to show that the arts are not special, they are just another sector. I just don’t see how that is effective arts advocacy. #

Amazon and economic impact: either/or

Michael Rushton — Thu, 16 May 2013 02:04:02 +0000

The Daily Telegraph reports: #

Amazon’s UK operation generated £4.2bn of sales last year, but it used a subsidiary in Luxembourg to help it reduce its corporation tax bill in the country to just £2.4m in 2012. According to documents filed at Companies House, the company received £2.5m in government handouts over the same period. #

Also: #

The Seattle-based company would not say which investments the UK Government has helped with, but last year it opened a new distribution plant in Hemel Hempstead, creating 600 jobs, promising to open three more over the next two years. #

The comments section for the article is much what you would expect: Why is the government giving money to Amazon!? But we know exactly the argument Amazon’s representatives would use: think of the economic impact! 600 jobs! And the indirect impacts and so on and so on … #

The false promise of economic impact studies (see this earlier post) puts all sectors – nonprofit arts, commercial book retailers, casinos, football stadiums, telephone call centers – on the same footing. They can all make the same claims of job creation and spin-off effects. Either we reject this method of analysis, or we recognize that many, many firms will approach government with the same claims. #

On special showings for seniors

Michael Rushton — Mon, 13 May 2013 11:50:39 +0000

At the Freakonomics blog, Daniel Hamermesh reports on pricing at his local cinema in suburban London: #

Every Tuesday they show a recent movie (e.g., Lincoln is showing on May 21) and charge only £3 ($4.60). Moreover, you get “free tea, coffee and biscuits!” Such a deal—so how can they make money off this, or is it just altruism by the theater owners toward us old folks? #
The movie costs no extra rental, and the only variable costs are the wages of the one or two workers who sell the tickets and make the eats. The fixed costs—of the movie rental, the theater and heating/electricity, are irrelevant for the owner’s decision. I should think that, if they can sell even 20 tickets, they will increase their profits. #

Hmm, I’m not sure. I don’t know where he lives, so I did a quick search for movie theatres in South London and came up with the Empire Cinema in Sutton, Surrey. Indeed they have a special screening each Wednesday morning at 11:00 specifically aimed at seniors, a film is presented that is already on DVD (this week it is The Impossible), with complementary tea and coffee and all at a “special price” (which is not posted, though I note that their Tuesday price is a discounted £4.95 for all seats, all films). #

But does that earn a profit? As Hamermesh notes, it is the marginal cost that matters – what are the additional costs to the cinema of presenting this particular screening? It takes people to serve the tea and show the film, and the rental is not free: my understanding from the fee structure of the Motion Picture Licensing Company is that there is a minimum of £75 per showing for film societies even if no admission fee is charged, and so I would have to imagine a license fee applies as well to established cinemas. #

To find whether the showing is profitable, we then compare marginal cost to marginal revenue – how much will total revenues rise from doing this screening? That would depend on the box office taken for this particular screening net of any changes to revenues from all the other movies shown that week. If seniors wouldn’t go to any other movie anyway, then we can just add up what they pay for the Wednesday morning show. If on the other hand the free tea on Wednesdays means they forgo seeing Iron Man 3 on the weekend, we would have to subtract that lost revenue. #

If the Wednesday morning show runs at a loss, can we explain? After all, this is a commercial cinema. It might help build goodwill amongst potential movie-goers in the neighbourhood to know that grandma and grandpa are getting a nice morning with their friends at the movies. It might also build goodwill in the Surrey County Council, useful when issues around zoning, parking, or hours come under discussion. #

Or it might be that, as Hamermesh hints, there is some altruism. We ought not to treat commercial arts venues as entirely different from nonprofits. Commercial providers actually might want to show some altruism to a group, even if the official mission is to maximize profits, and it is not unknown for nonprofit arts organizations to aggressively pursue maximum returns on their presentations. #

Other ideas? #

How student discounts work

Michael Rushton — Mon, 06 May 2013 00:23:03 +0000

Student discounts are offered many places – in restaurants, theaters, tuxedo rentals – and in both the commercial and nonprofit sectors. Nonprofits might want to discount student prices on equity grounds, giving them a break because they have less disposable income. But commercial firms offer these discounts too. It might be to try to gain loyalty to the brand that will extend beyond the customer’s student years. But it also could be simple price discrimination, recognizing that students have different demand patterns than graduates. #

How to set the discount? I’ll keep using students as my example, but this strategy can be applied to any identifiable group: seniors, veterans, those on social assistance, those who live within a particular geographic region, etc. All that matters is that you can identify whether or not the customer belongs to the group. #

To begin, imagine students and non-students as separate markets, in the same way that publishers and pharmaceutical companies treat different nations as separate markets. Then for each market, set the price that maximizes net revenues in that specific market. In other words, pick a student price that maximizes net revenues from students, and pick a non-student price that maximizes net revenues from non-students. This requires gathering intelligence on how these different segments of the population behave. How does student demand respond to a lowering of prices? How about the demand by non-students? You need to gather information on each of these types of sales over time to get a sense of the different demand patterns. Only then can you set about finding the prices for each segment that generate the most net revenue. #

What are the limitations on the strategy? #

First, there has to be a means whereby students cannot resell their purchases to non-students, making a profit for themselves. Perhaps student admissions are clearly marked as such, or the good cannot be bought in advance (like a ticket) but must be consumed directly on the premises (as in restaurants). Firms who price discriminate across countries in which they sell can only make it work if no one has incentive to purchase the good in the low-price country and ship it to the high-price country for resale at a profit. #

Second, keep in mind that the higher the price differential between the two market segments, the higher the incentive for customers to cheat. Nobody is going to look for a fake student identification card in order to get a 10% discount at the local lunch buffet, but if it is a 50% discount and more is at stake, they might. #

Third, as the price differential increases, those paying the higher price might come to feel that their own price is unfair, and be turned off buying at all. This risk is increased if the group receiving the discount is not particularly impoverished, but simply has different willingness-to-pay for the product. Discounts for seniors are not likely to be as problematic in this respect, since it is a discount most people hope to one day enjoy themselves. #

Each of these limitations works in the same direction: don’t make the discount too large, even if demand patterns are quite different across the two groups, as it will increase incentives for attempts at resale, and for people falsely identifying themselves as being in the group receiving the discount, and lead to bitterness by those paying a higher price. The less these factors are likely to be an issue, the more the pure strategy of focusing on demand by the two market segments can be used. #

Why a lottery?

Michael Rushton — Thu, 02 May 2013 12:11:52 +0000

The Daily Telegraph reports on a new offer by the English National Opera: #

Fans buying tickets to see the ENOs most popular performances will be given the chance to win the best seats in the house under the new “secret seats” scheme. #

The gamble could also see them end up with the worst seats, although organisers promise no view will be restricted and no ticket will be worth less than £25 ordinary sale price. #

The scheme was launched as part of a new season announced yesterday, as the ENO aims to redress a financial deficit in the face of further arts cuts. … #
The Secret Seats scheme will be available for all productions, with a varying number of seats depending on its popularity. #
All tickets will cost £20, with a possibility of fans being allocated tickets worth £25 to the best seats in the house priced at £125. Other tickets, with restricted views, will still be available at a basic £12. #

Here are two things we can say about consumers. First, they prefer certainty about what they are purchasing over uncertainty. Second, they differ in their willingness to pay for higher-quality and lower-quality seats, a fact that lies behind the rationale of presenters charging different prices for those seats. #

So why would any presenter, never mind one in financial difficulty, allocate seats by lottery? The story doesn’t explain why anyone thinks this is a good idea. I just can’t see the logic. #

What do we talk about when we talk about the economic impact of the arts?

Michael Rushton — Tue, 30 Apr 2013 23:38:37 +0000

In the news from Britain in the past week has been a speech by Culture Minister Maria Miller on the arts and the economy in the UK – the full text is here. Commentary has ranged from the concern about putting too much emphasis on the economic, to how we ought to define cultural industries in the contemporary world. I would like to focus on what linkages the Minister sees between culture and the economy. As Tim Harford notes, the speech is a bit of a jumble, so let us try to untangle some of the knots. #

I see three kinds of ways to think about the arts in the economy. #

The first is exemplified by this part of the Minister’s speech: #

Just last week I hosted a reception to launch the Buxton Opera Festival. Their audiences have tripled in a decade. They have won national and regional tourism awards. They have diversified their income streams, and as a result they have generated more than a million in turnover. The other side of the Peak District, the Yorkshire Sculpture Park supports around 100 full time jobs, and is delivering close to £5 million of economic impact to its local community. These are unqualified local success stories. #

This is what is most commonly thought of in the United States when we hear the words “economic impact.” The arts is an economic sector with consumer spending and employment and can be fitted into input-output tables of demand, whereby spending in the sector is factored up by a “multiplier” to find the total economic impact. Americans for the Arts have built a small cottage industry from persuading local and regional governments and arts advocates to construct such studies. And the numbers contained within the studies are of no worth whatsoever. First of all, every sector – hair stylists, dry cleaners, furniture makers, taxi drivers – has an “economic impact” that could be calculated by similar means. It is surely odd for arts advocates to think impact studies help their case for public subsidy, when they are reducing the arts to simply some amount of spending, as we could do for any humdrum industry. Second, it is never made clear what “economic impact” actually means in these studies. Is it the loss in income a region would suffer if all cultural workers were suddenly vaporized? That’s not a very interesting thought experiment, since on this planet the workforce shifts from sector to sector according to changes in demand; employees don’t simply disappear. Third, the estimate of impact – say £5 million for the Yorkshire Sculpture Park – doesn’t really suggest a call for any sort of action. Is £5 million a big number or a small number? I have no idea. What are we supposed to do with that estimate? These studies are a waste of resources. #

The second sort of economic impact could be captured by this part of the speech: #

The close relationship, and mutual dependence, between culture and the creative industries is not lost on me, I spent over 20 years in the advertising industry and, as a former advertising executive, I know how fluid talent has become between the creative industry sub-sectors. These points are backed up by BAFTA’s research which shows most people migrate into film and television from theatre; and Skillset’s research which suggests more than three quarters of film workers cross over into other audio-visual productions. #
Given that the global appeal of our creative industries is worth some £36 billion to our economy, is it essential that the underpinning role that culture plays is properly understood. It is also to be welcomed that the Arts Council sit on our Creative Industries Council, helping ensure our work is properly coordinated, so that we can ensure that work is really understood and co-ordinated. #

In this case, the economic effect is not simply that money is spent on the arts and related hospitality firms, but rather that it generates returns to other industries through creativity and innovation. Given that innovation is indeed the key to economic growth, the notion that the fine arts generate positive effects in other creative sectors is an important one. It must be said the evidence on these effects is still being gathered, but, unlike the old style “economic impact” study, at least this idea has some coherence. #

The third way to think about economics and the arts takes us back into the mid-twentieth century. Based upon the branch of mainstream economic theory known as welfare economics, the notion here is that there is market failure in the private sector provision of the arts: access will be unequally distributed across the citizenry, and there are aspects of the arts that benefit the whole of society beyond just those who happen to attend plays and concerts and museums – culture is being conserved for future generations, and provides a shared sense of identity. The Minister says: #

Arts and culture underpin what it means to be British; how we see ourselves. #

Without going into high microeconomic theory: when there is a good, in this case culture, that provides benefits beyond the direct attendees, the private sector will tend to underprovide the good – producers take into account only the demand by the market and not the wider social impact. This represents the classic economic case for public subsidy of the arts: the “economic impact” is through the art itself, and its direct benefits to the society as art. No boosts to new media, no increase in demand for hotels and restaurants, just the value of the art itself. I like that. #

Lotteries should not be used to fund the arts

Michael Rushton — Sun, 28 Apr 2013 22:49:44 +0000

Blog neighbor Greg Sandow posts about the relationship between arts funding and gambling, especially regarding early Italian opera. It’s tongue in cheek, but he concludes: #

For those without a sense of humor: I know very well that gambling raises moral questions, and legal questions, too, not to mention questions involving real estate. Where would the Met put its new casino? Where in the opera house would there be room enough? #
But let’s not forget that gambling — I’ll never call it “gaming,” its euphemistic marketing meme — has spread throughout the US, and that lotteries are an important source of state government revenue. And let’s also not forget that nonprofit arts institutions are, more and more, going down profit-making paths to fund themselves. And that casinos in Las Vegas and Atlantic City have been in the performance biz for years, offering glittering shows by superstars. Pavarotti sang in Atlantic City. So is gambling at the Met really so far-fetched? #

I do have a sense of humor, and recognize a blog as a place to write something other than common wisdom (there’s no point in having a blog in the first place if not to introduce something new to the conversation). So I come not to criticize his post, but to use the chance to say something about gambling and the arts. Because it *is* used. Not so much in the US, but in the UK a significant portion of National Lottery profits are devoted to the arts, and the same is true in my homeland of Canada. Out here in Indiana the state runs a lottery as well. #

State-run lotteries are a very regressive tax. The profits that the lottery firms generate, because they are state monopolies (I can’t just go out and be entrepreneurial, starting up my own private lottery), are the exact equivalent to a tax on the lottery sector. All evidence points to the fact that lower-income individuals spend a significantly higher proportion of their income on lotteries than others. If anyone wants to point to this as a “sin” tax, equivalent to the tax on cigarettes, note that (1) the government doesn’t run the tobacco companies, and (2) the government doesn’t actively try to encourage people to smoke. Lottery funded “scholarships”, like the HOPE in Georgia, represent transfers of income from poorer (lottery buying) to richer (college attending) counties. Given that arts advocates would love to shed the image that public funds for the arts benefit only an elite, one would think they would strongly resist funding by such regressive means. #

Strategic gaps in the paywall

Michael Rushton — Fri, 26 Apr 2013 12:09:41 +0000

At Slate, Matt Yglesias reports that advertising revenues are down, but subscription revenues are up, at the New York Times: #

I’ve been skeptical about digital subscription models for a long time, but I’m turning into a believer. A key change has been the development of technological means of making the paywalls actually pretty porous, which turns them into more a form of price discrimination than anything else. A well-designed paywall attracts revenue from hardcore fans of a website while still making it possible for casual fans to read the occasional article and thrifty people to sneak around it. The Times Company is announcing a “New Strategy for Growth” today that seems largely focused on developing finer-grained forms of price discrimination, such as making it possible to buy a cheap subscription to just a sub-set of the overall NYT content. #

Why does a well-designed paywall allow some people to sneak through? There are two ways papers make money: subscriptions and advertising. The pricing model for subscriptions needs to take into account the advertising side – make what you can from people who are willing to pay for the subscriptions, but from people who are not, do not worry about letting them through, since it helps boost advertising demand. It can’t be made too easy to sneak through, since in that case the subscription base would collapse. So in the same way that Broadway theatres make it possible, but inconvenient, to buy day-of-show tickets at half-price, so the Times will make it possible, but inconvenient, to get through the paywall. #

There is another consideration. I would venture that the consumer demand for the Times is in some degree dependent upon network effects. That is, I am more interested in reading the Times the more I believe that other people are reading it – I want to be ‘in the loop’. When demand is influenced by network effects, it can make sense for the producer to allow some people (but not all!) to sneak around the paywall, in order to build the size of the network. For example, if I were making an office software package that I wanted to become the dominant seller worldwide, I would not be upset if some users, especially from places with low ability or willingness to pay for the good, found a way to get free copies. #

Today in concession fares

Michael Rushton — Thu, 25 Apr 2013 13:15:22 +0000

Laura Pedersen of the New York Times reports: #

A packed crosstown 86th Street bus going west. #
A man and a child who looks to be about 4 are sitting side by side. #
A large older woman seated nearby belligerently says, “You didn’t have to pay for that child, so you must hold it on your lap.” #
The man politely replies, “You paid only a senior half fare, so you can only use half a seat.” #
Conversation over. #