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Beating the Box Office Blues

5/14/2012 --

Study by Ross professor finds secondary ticket sales can boost revenue for event promoters, but suggests ticket options are the best plan.

ANN ARBOR, Mich. — Anyone who has bought tickets for an event has felt the anxiety: What if something comes up and I can't make it?

Or, what if I wait to buy tickets and it sells out?

Tickets usually are nonrefundable and can be expensive. Secondary ticket services like StubHub have made reselling tickets easier for those who find they can't use them, as well as for the spontaneous buyer. Even before StubHub, brokers and scalpers ran a thriving secondary ticket market.

But is the ticket resale market — via either StubHub or traditional brokers — bad for event organizers? The traditional view is yes, and Ticketmaster, the largest ticket distributor in the U.S., has tried to slow the secondary market by pushing paperless tickets and attempting to influence legislation.

So if the resale market is harmful, why do some professional teams and college athletic departments partner with services like StubHub to help fans resell tickets?

Ross professor Izak Duenyas sought concrete answers to these questions. He and co-authors Ozge Sahin of Johns Hopkins University's Carey Business School and Ross PhD candidate Yao Cui ran models, interviewed event managers, and found the secondary market actually boosts revenue for event organizers in many cases, especially when prices are fixed. They approached the issue from a revenue-management angle.

They presented their paper, "Should Event Organizers Prevent Resale of their Tickets?" earlier this year at the MIT Sloan Sports Analytics Conference. The stakes in the business are huge, with primary ticket sales reaching $20 billion a year and the growing resale market generating $3 billion.

The authors found that with the growing practice of dynamic pricing, where ticket prices are adjusted based on demand, secondary markets can be a positive, neutral, or negative depending on demand and capacity.

But the best plan, according to the study, would be to offer ticket options. In that case, customers pay a fraction of the price to reserve a ticket and then can either exercise the option — buying the ticket — or walk away and only lose the reservation fee. It's a win for both the event and the customer but hasn't been widely adopted.

The reason the secondary market is good for event revenue in many cases is because the ability to resell increases the value of the ticket for the hard-core fans who buy in advance. The harder it is to resell tickets, the less money event organizers stand to make when prices are fixed. The fixed-price model is widely used by concert and sports event managers.

"If the biggest fans buy tickets in advance but can't resell them if something comes up and they can't attend, they'll be less likely to buy in advance or pay the same price again," says Duenyas, the John Psarouthakis Professor of Manufacturing Management and Professor of Operations and Management Science. "The fact that the secondary market exists actually makes it more likely that fans buy at any given price. Without a secondary market, event organizers would have to sell the tickets at a lower price to induce fans to purchase."

That's why sports teams and athletic departments, including U-M's, partner with StubHub or other services to facilitate fan-to-fan ticket resale.

The situation gets more complicated with dynamic pricing — especially when there's excess capacity. In dynamic pricing, tickets are sold in advance at a certain price but then adjusted depending on demand. A secondary market still is beneficial in this situation if tickets are in high demand and seating is limited. But when there's too much capacity, a secondary market can depress revenue.

That problem can become acute with regional operas, for example, which tend to play in large concert halls that rarely sell out.

Co-author Sahin says the best solution for both event promoter and customer is ticket options. If an opera ticket, for example, is $120, a customer could pay $30 to reserve a ticket. If he chooses to exercise the option, he'd then pay another $110 for the ticket. If not, the event promoter keeps the $30 and sells the ticket to someone else. This gives the customer flexibility and a relatively cheap out if they can't make it, which justifies the added expense. It allows the venue to control the secondary market.

"As the event manager, you are controlling more of the value chain and its revenue," Sahin says. "As the customer, you have the peace of mind that you can reserve a seat for a fraction of the full price. It's a win-win."

Ticket options would be a big advantage for such athletic tournaments as the World Cup or the Olympics, Duenyas says. Fans of the USA basketball team or Brazil's soccer team could buy ticket options for the final game, figuring their team is a good bet to make it. If the team falters, fans are only out the option price, but the World Cup or Olympic organizers pocket the option revenue and sell the tickets to fans of teams in the final, who are now very excited about the opportunity to see their team.

"We show in the paper that using options is the highest revenue-making solution," Duenyas says. "But it's been slow to catch on. There were some incidents of event managers selling more options than they had seats, which gave it a bad name. But used correctly, it's the better way for both venue and customer. These things take time."

-Terry Kosdrosky



For more information, contact:
Terry Kosdrosky, (734) 936-2502, terrykos@umich.edu