I recently read Andrew Sweeting’s paper on Equilibrium Price Dynamics in Perhishable Goods in Secondary Markets for MLB Tickets. I am constantly thinking about dynamic pricing models and Sweeting's analysis is a really interesting one for the secondary ticket market.
It’s an interesting explanation of why ticket prices tend to decline by economically significant amounts – 25% or more, as the time gets closer to the game. This is surprising given some other capacity constrained markets such as airlines charge more as use date approaches. Also, anecdotally we hear stories about very high-demand seats getting very expensive as the date approaches.
Sweeting’s research supports dynamic pricing models where prices are adjusted over time, especially those where an initial offer price is higher further out and then the tickets are offered at lower prices as the date approaches. This is the case because there are actually buyers who have a higher willingness to pay earlier in the ticket sales process (Sweeting argues this is due to search costs and the risk of the lack of future availability).
I believe there is an information gap as buyers, unless they spend a lot of time like us Econ dorks looking at eBay auction data, are not aware of this paradigm. Also, there is a transport gap – paper tickets are hard to move in the last few days.
Sweeting argues that declining prices can only be the equilibrium outcome if people are willing to purchase early when expected prices are relatively high. Consumers should be able to time their purchases. To support his hypotheses, he looked at two markets. One was StubHub, which has only posted prices, not transaction prices, and “Market 2” which sounded a heck of a lot like eBay to me.
Two arguments for falling seller demand are:
1) Seller Explanations: Falling Opportunity Cost and Time-Varying Demand/Revenue Elasticities. To keep it simple, this can be summed up as meaning as the ticket date approaches, the chances of making a big kill and finding a high WTP buyer are lower. And if you don't sell them by the end, you're screwed.
2) Learning by Sellers – All customers have the same reservation value for the item, about which the seller has prior beliefs. Typical pricing strategy starts high, and if they are not sold, then seller cuts price in 2nd period. If the WTP was higher, they’d all buy and all the tickets would have already sold!
So why do people purchase early if prices will fall? Two reasons:
Uncertain future availability – You’re afraid if you don’t buy now, you’ll lose out on getting to take your son to the game on his birthday. If you were an econ dork, you’d worry less about this.
Search costs – It costs you time (and time = money) to sit around trying to win an auction to save some money, or you have to log in again later to get tickets. So just buy ‘em now, pay a bit more and pencil the game in your calendar.
Interesting paper. More on this shortly.