Are Robot Scalpers Ripping You Off? Do We Need Government To Stop It?

(Mis)Uses of Technology

from the outlawing-our-robot-overlords dept

Ticket scalpers have a bad rep. Critics deride them as “malicious” and “bad actors” and sometimes even deem them the primary cause of a purported nationwide “bot epidemic.” Responding to fan complaints about the paucity of tickets, de facto monopolist Live Nation Entertainment points to the scourge of “bots” ? software that allows scalpers to buy tickets en masse and resell them on secondary-market sites like SeatGeek and Stubhub.

Instead of finding a solution on their own, ticket sellers want the federal government to do their policing for them. In July, Sens. Jerry Moran and Chuck Schumer introduced the BOTS Act, a bill that promises “equitable consumer access to tickets.” The most recent Senate hearing on the issue featured compelling personal narratives about fans who weren’t able to get cheap tickets to popular shows, such as the hit musical “Hamilton.”

But closer analysis of the legislation’s details cast doubt on whether it truly would benefit fans. Indeed, it clearly misses several crucial pieces of the puzzle.

A solution in search of a problem

The first question is obvious: are ticket-harvesting bots actually a significant problem? To be sure, those who seek to outlaw them are armed with anecdotes. Research from New York Attorney General Eric Schneiderman finds “at least tens of thousands of tickets per year” are acquired using bots. But given that Live Nation’s Ticketmaster service sold 147 million tickets in 2012, even if bots acquired 100,000 tickets a year, that would still be significantly less than 1 percent of all tickets sold.

For its part, Ticketmaster estimates that “60 percent of the most desirable tickets for some shows” are purchased by bots. Leaving aside the profusion of qualifiers needed to make even that claim, it probably shouldn’t be surprising that high-demand and underpriced tickets are the most likely to be resold. But this ignores that venues contribute to the problem by not making tickets available to the general public in the first place. For example, analysis of a 2013 Justin Bieber concert in Nashville, Tennessee, revealed that 92 percent of tickets were presold for credit-card promotions, to fan clubs, to VIP programs or to the artist. Even if bots bought 60 percent of the Bieber tickets released to the general public, it would represent only 4 percent of the show’s seats.

‘Unfairness’ is in the eye of the beholder

The BOTS Act would punish digital ticket scalping as an “unfair and deceptive” practice. But the way tickets currently are sold is neither fair nor transparent. Schneiderman’s report acknowledged that ticket sellers are complicit in limiting the general public’s access to tickets. The investigation found a majority (56 percent, on average) of tickets are presold or put on hold for the most popular concerts. Given that managers and artists often resell these tickets to the highest bidders, it’s clear why industry insiders support a crackdown on bots. They compete directly in the resale market.

The culture long ago evolved to regard scalpers with moral repugnance, similar to the opprobrium reserved for price gougers, speculators and arbitrageurs. Indeed, Nobel laureate economist Alvin Roth has identified ticket scalping as a market in which repugnance discourages what would be otherwise efficient market activity. But norms can change. Usury ? that is, charging interest on loans ? also was once widely deemed morally repugnant, but modern financial markets could scarcely exist without it.

Writing in The New York Times, Harvard University economist Gregory Mankiw notes of his recent experience spending $2,500 for tickets to “Hamilton” that it “was only because the price was so high that I was able to buy tickets at all on such a short notice.” Mankiw’s tale illustrates a frequently forgotten fact ? namely, that tickets purchased by bots do end up in the hands of genuine fans. By making tickets available closer to the event date and by raising their perceived cost, scalpers also help ensure that venues fill.

When scalpers buy and resell tickets, they bear the risk of stale inventory so that primary ticket sellers don’t have to. Like any investment, scalpers can lose money. When scalpers guess wrong, they have to sell tickets at below face value. This allows the market to clear and allows consumers to buy at a price that better matches how much they value the experience. Tightening controls on ticket resellers would expose primary ticket outlets to a liquidity and seat-inventory risk.

Scalpers also help provide crucial market information both to venues and to consumers. The prices paid in the secondary market signal to venues when tickets are underpriced and concerts are undervalued. Secondary-market vendors such as SeatGeek, for example, collect and share data on past ticket transactions to provide ticket cost analysis to vendors and fans. These services create value for consumers and shouldn’t be suppressed.

Because it would raise the cost of using bots, the BOTS Act would leave fewer tickets available through services like Stubhub and even Ticketmaster itself. It wouldn’t kill the secondary market, but scalpers likely would raise prices to account for the higher risk that any given ticket will go unsold. It also would change the distribution of tickets to favor those willing to stand in line the longest, those who have the fastest internet connections or even just those who happen to have good timing or good luck. It’s hard to see how any of this benefits fans.

Another expected effect of legislation like this would be to reduce innovation in ticket sales. Fueled by the demand for tickets, investors continue to fund new entrepreneurs in the event space. For example, the app Pogoseat allows existing ticket holders to browse and purchase potential seat upgrades from their smartphones while they are in the venue. Sites like SeatGeek provide information on the going prices of tickets, helping consumers gauge whether they are getting a good or bad deal. Punishing digital ticket resellers probably would scare away capital investments in apps that better match consumers with tickets, leading to worse outcomes for everyone.

The case against federal regulation

There are some subtle differences in the two versions of the BOTS Act currently wending their way through Congress. The House version ? H.R. 5104, sponsored by Reps. Marsha Blackburn and Paul Tonko ? would make the purchase and use of bots to acquire tickets a federal crime. The Senate bill is vaguer, prohibiting the “circumvention of control measures used by Internet ticket sellers to ensure equitable consumer access to tickets.” The Senate version also could affect a broader range of user activities ? for example, allowing primary ticket outlets to bar season-ticket holders from reselling their seats.

The law would empower the Federal Trade Commission to police compliance with the terms and conditions of private contracts. That sets a dangerous precedent. Under Sen. Schumer’s vision, the FTC would target websites that assist in selling digitally scalped tickets, issue cease-and-desist orders and level fines in the millions of dollars for unfair trade activities. In practice, the law would grant the entertainment industry a hammer to smash its competition in the resale market.

But little effort has been made to explain the case for federal involvement in an area in which state enforcement long has proven more than adequate. More than 30 states have scalping laws and 14 states ban the use of bots in ticket purchasing. Furthermore, ticket fraud and other coercive activities are already illegal under criminal law. A federal criminal statute would be both redundant and excessive.

For that matter, the industry appears perfectly capable of handling this issue on its own. Venues and primary ticket sellers can and do recover tickets from individuals who purchase them in violation of the terms and conditions. In 2007, Ticketmaster successfully sued software maker RMG Technologies for $18.2 million over programs designed to circumvent anti-scalping measures. Companies also spend big sums hiring machine-learning experts to outwit the bots. The BOTS Act would shift these enforcement costs to the federal government, and ultimately, to the taxpayers.

There are simpler solutions

Basic economics dictates the easiest way to minimize scalping is either for venues to raise ticket prices or for artists to have many more concerts. The secondary market for tickets exists only because venues and artists routinely underprice and undersupply tickets. If artists truly want their fans to have access to lower ticket prices, they can hold concerts over consecutive nights or schedule them at larger venues. Increasing supply for the most popular concerts will shrink the secondary market.

Country singer Garth Brooks chose to add concerts to cities based on demand. His decision to disrupt the way concerts are scheduled made him the highest-paid country performer in 2016. Ticketmaster has also begun to price tickets based on supply and demand, and holds its own auctions. Major League Baseball instituted dynamic pricing in 2013. The Ultimate Fighting Championship circuit also uses dynamic pricing, making it more difficult for resellers to make a profit. These are much more direct ways to overcome inefficiencies in the ticket market.

The BOTS Act would lock the industry into its current practices, effectively protecting insiders’ business models at the expense of competitors and consumers. Live Nation controls about 85 percent of the primary ticket market. Without competitive pressure from other ticket sellers, secondary markets or customers, the firm has little incentive to improve how tickets are supplied.

Efforts to criminalize bots draw attention away from the larger conversation about how venues misallocate tickets in presales. It also detracts from important policy questions about the role of government in enforcing private companies’ terms and conditions. If Congress is genuinely interested in benefiting fans, it should allow entrepreneurs to find better ways to match consumer preferences and empower fans to choose how tickets are sold.

Anne Hobson is a technology policy fellow at the R Street Institute. Christopher Koopman is a senior research fellow with the Project for the Study of American Capitalism at the Mercatus Center at George Mason University.

Filed Under: bots, competition, congress, economics, scalping, tickets