Money for Nothing

Kid Rock Vs. StubHub

Ticket scalping is a form of “rent-seeking” in which powerful actors manipulate legislation to get something for nothing. So why is it about to be legalized in Michigan?

Here’s the scene: Rich, out-of-state lobbying interests descend upon a Midwestern state. Opponents and proponents of a bill seem to be talking past each other, each waving banners of rights. And now, this state moves one step closer to joining a worrisome national trend.

Indiana’s Religious Freedom law?

No—Michigan’s ban on ticket scalping, which may end this week if StubHub (owned by eBay) and other multimillion-dollar reselling behemoths have their way. Michigan’s State House voted to repeal the ban on March 25. Eyes are now on that state’s senate.

In the absence of federal regulation, the laws on scalping are a state-by-state patchwork. Almost all states regulate the practice in some way, but most regulations are quite loose, only prohibiting fraud, for example.

About 12 states have meaningful anti-scalping regulations. Some, like New York, regulate reselling agencies but not individual sellers. Some ban scalping in certain locations but not online (Arizona, Delaware). And some are holdovers from an earlier time: In Hawaii and Indiana, for example, scalping is legal… except for boxing matches.

Only three—Arkansas, Michigan, and Rhode Island—come close to banning the practice, though even they allow for small markups, charity resales, and other exceptions.

In other words, Michigan is among the last states standing—and surely the most important, given that Detroit is a lot bigger than Little Rock, and Michigan could contain a dozen Rhode Islands. And even though Michigan’s ban is almost never enforced against individuals, it does get in the way of large scalping companies setting up shop.

To scalping’s defenders, ticket reselling is the American way. Tickets aren’t contraband, and the last thing we need is more government regulation. Anyway, you can think of tickets as a finite resource; scalpers are just helping find the efficient market price where supply meets demand.

Scalping’s opponents divide into three overlapping camps.

First, of course, are the fans, who would loyally sleep outside a box office for hours (or days) if that would still do anything. But those days are gone. Ever more intelligent online bots seem permanently one step ahead of the half-assed attempts of Ticketmaster and StubHub to defeat them. Those people in line are suckers. That leaves fans with no option other than paying a professional parasite hundreds of dollars to rip them off.

Second are venues and artists. In Michigan, the anti-scalping coalition includes Kid Rock, the Detroit Lions, Michigan State University, and the Van Andel Arena. These are the people who lose millions in revenues and goodwill when rich douchebags snap up concert tickets for thousands of dollars, and actual fans get left out in the cold.

Third, though, are the lawyers and economists. And this is where it gets interesting. Through an economic lens, scalping is a form of rent-seeking. It’s basically getting something for nothing. Sure, individuals fobbing off their unusable tickets is harmless enough. But those days are over, too. The contemporary scalping industry is just that: an industry. Professional parasites grab the tickets using advanced technology, giant companies cut sweetheart deals with promoters and sports leagues, and a bunch of people make money for nothing.

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The term “rent-seeking” goes back to Adam Smith, who divided incomes into profit, wage, and rent, the last being, effectively, fees charged for the use of a property that does not actually cost the owner anything. In economic terms, it is that portion of income that is above and beyond the cost needed to keep the property employed in its current use. In lay terms, I charge because I can.

The classic example, courtesy of economist Robert Shiller, is a feudal lord who puts a chain across a river, and then charges passing boats to lower the chain. The lord doesn’t do anything to preserve the river or maintain public safety. He just puts the chain up because he can, and makes money from something that used to be free.

Rent-seeking, then, is the attempt to get more “rent” by manipulating the social or political conditions in which economic activities occur, rather than by actually making or doing anything. I don’t contribute anything to the economy, but because I can capture legislatures and quasi-monopolies, I can set it up so that my activity is legal and sanctioned.

Any market with scarcity in it is vulnerable to rent-seeking. Taxi licenses are one example. Sure, everyone supports safety, insurance, and license requirements for taxi drivers. But as Uber has found out lately, many licensing restrictions are there simply to limit competition and have fewer cabs on the road. That is rent-seeking by way of regulatory capture.

Rent-seeking in a case of scarcity also encourages speculators. In real estate, for example, there is little intrinsic relationship between price and value—it’s location, location, location, and if Williamsburg is where you want to be, then you’ll pay just about anything to be there. Since the maintenance of the Williamsburg building isn’t that much more than the maintenance of one in East New York, speculators are richly rewarded if they bet the right way (or have enough capital to bet on everything). They can charge rents because the resource is scarce, not because they’ve actually done anything of value.

That’s exactly what happens in ticket scalping. The resource is finite, and while there theoretically should be downward price pressure from competition, professional rent-seekers have learned how to play the market far better than any Lynyrd Skynyrd fan. The result is that the only people who can get them are what industry folks call “high value consumers.”

Thanks to technology, rent-seekers have now come to dominate ticket markets, accounting for over 50 percent of high-value tickets at large-scale events. This has distorted the incentives in place in a “natural” market. Venues and artists have to balance their incentives to make as much money as possible against their incentives as not to alienate fans. The result is a closer-to-optimal price that reflects long-term as well as short-term value.

Scalpers, of course, have only the first incentive. They have no long-term interest in maintaining goodwill, and thus create significant externalities: negative value in the form of ill will that is then visited on artists and venues, in the form of lower attendance at events. They’re bummers borne of other people.

Which is why artists and venues are leading the fight in Michigan. Free-marketeers say that scalping helps find the optimal price for tickets—but that is only the short-term optimal price. Think about it: If $2,000 is the optimal price for that Kid Rock seat, then why isn’t Kid Rock charging it? The reason is that doing so is a long-term loser.

Data from the handful of economic studies of scalping bear this out. A 2012 study found that “inefficiencies”—the way economists describe people getting something for nothing—arise when scalping is unregulated, and that attendance at events falls. Conversely, the same study showed that regulation of secondary markets increases overall attendance at arts events. A 2014 study showed significant rent-seeking in primary ticket markets when secondary markets were unregulated.

So why is this practice being legalized in Michigan?

Not surprisingly, every time reporters have looked into the issue, they’ve seen the color of money. Before Florida lifted its ban, StubHub and others donated to state campaigns and heavily lobbied legislators. The same folks are now lobbying in Michigan.

None of scalping’s supporters have ever explained why a simple ceiling on secondary ticket prices—say, 10 percent over face value—wouldn’t solve the problems of professional scalpers, while allowing real fans to exchange tickets freely.

Of course, the reason they can’t explain it is that these companies—supposedly respectable businesses like StubHub and eBay—earn their service fees because of the sleazy activities of individual shysters gaming the system with bots. That’s why they’ve even opposed an amendment to the Michigan law that would ban the bots. That measure will ultimately be toothless (hackers will just build a new, better bot) but any disturbance of the faux-free-market Force is too much to bear.

That ideology is woo, not economics. In fact, legalizing scalping is rewarding rent-seeking and legislative capture. It creates negative externalities, distorts markets, and rewards those who do not create value, while harming those who do. Oh, and if you actually want to go see your favorite band, it sucks.