Category: Economics for Business: Ch 20

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Secondary ticket markets: legitimate, a rip-off or downright illegal?

The UK Parliament’s Culture Media and Sport Select Committee has been examining the secondary ticketing market. The secondary market for events is dominated by four agencies – viagogo, eBay-owned StubHub and Ticket-master’s Get Me In! and Seatwave. These buy tickets to events in the primary market (i.e. from the events or their agents) and then resell them, normally at considerably inflated prices to people unable to get tickets in the primary market.

One example has grabbed the headlines recently. This is where viagogo was advertising tickets for an Ed Sheeran charity concert for £5000. The original tickets were sold for between £40 and £110, with the money going to the Teenage Cancer Trust. None of viagogo’s profits would go to the charity. The tickets were marked ‘not for resale’; so there was doubt that anyone buying a ticket from viagogo would even be able to get into the concert!

There are four major issues.

The first is that the tickets are often sold, as in the case of the Ed Sheeran concert, at many times their face value. We examined this issue back in September 2016 in the blog What the market will bear? Secondary markets and ticket touts).

The second is that the secondary sites use ‘bots’ to buy tickets in bulk when they first come on sale. This makes it much harder for customers to buy tickets on the primary site. Often all the tickets are sold within seconds of coming on sale.

The third is whether the tickets sold on the secondary market are legitimate. Some, like the Ed Sheeran tickets, are marked ‘not for resale’; some are paperless and yet the secondary ticket agencies are accused of selling paper versions, which are worthless.

The fourth is that multiple seats that are listed together are not always located together and so people attending with friends or partners may be forced to sit separately.

These are the issues that were addressed by the Culture Media and Sport committee at its meeting on 21 March. It was due to take evidence from various people, including viagogo, the agency which has come in for the most criticism. Viagogo, however, decided not to attend. This has drawn withering criticism from the press and on social media. One of the other witnesses at the meeting, Keith Kenny, sales and ticketing director for the West End musical Hamilton, described viagogo as ‘a blot on the landscape’. He said, ‘Ultimately, our terms and conditions say ticket reselling is forbidden. If you look at the way that glossy, sneaky site is constructed, they’ve gone an awful long way not to be compliant in the way they’ve built their site.’

The Competition and Markets Authority launched an enforcement investigation last December into suspected breaches of consumer protection law in the online secondary tickets market. This follows on from an earlier report for the government by an independent review chaired by Professor Waterson.

The government itself is considering amending the Digital Economy Bill to make it illegal to use bots to buy tickets in excess of the limit set by the event. Online touts who break this new law would face unlimited fines.

Articles

Official sites and documents

Questions

  1. Use a demand and supply diagram to demonstrate how secondary ticket agencies are able to sell tickets for popular events at prices several times the tickets’ face value.
  2. If secondary ticket sites and ticket touts are able to sell tickets at well above box office prices, isn’t this simply a reflection of people’s willingness to pay (i.e. their marginal utility)? In which case, aren’t these sellers providing a useful service?
  3. How do secondary ticket agencies reduce consumer surplus? Could they reduce it to zero?
  4. See Tickets, the primary market ticket agency, has set up a secondary site, whereby fans can trade tickets with one another at a mark-up capped at just 5%. Will this help to reduce abuses on the secondary market, or is it a totally separate part of the market?
  5. Would it be a good idea for event organisers to charge higher prices for popular events than they do at present, but still below the equilibrium?
  6. How does the price elasticity of demand influence the mark-up that secondary ticket agencies can make? Illustrate this on a diagram similar to the one in question 1.
  7. What measures would you advocate to make tickets more available to the public at reasonable prices? Explain their benefits and any drawbacks.
  8. What would be the effect on prices if the use of bots could be successfully banned?
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Populism and economics

Economists were generally in favour of the UK remaining in the EU and highly critical of the policy proposals of Donald Trump. And yet the UK voted to leave the EU and Donald Trump was elected.

People rejected the advice of most economists. Many blamed the failure of most economists to predict the 2007/8 financial crisis and to find solutions to the growing gulf between rich and poor, with the majority stuck on low incomes.

So to what extent are economists to blame for the rise in populism – a wave that could lead to electoral upsets in various European countries? The podcast below brings together economists and politicians from across the political spectrum. It is over an hour long and provides an in-depth discussion of many of the issues and the extent to which economists can provide answers.

Podcast

Should economists share the blame for populism? Guardian Politics Weekly podcast, Heather Stewart, joined by Andrew Lilico, Ann Pettifor, Jonathan Portes, Rachel Reeves and Vince Cable (23/2/17)

Questions

  1. Why has globalisation become a dirty word?
  2. Assess the arguments for and against an open policy towards immigration?
  3. In what positive ways may economists contribute to populism?
  4. Do economists concentrate too much on growth in GDP rather than on its distribution?
  5. Give some examples of ways in which various popular interpretations of economic phenomena may confuse correlation with causality.
  6. Why did the proportions of people who voted for and against Brexit differ considerably from one part of the country to another, from one age group to another and from one social group to another?
  7. In what ways have economists and the subject of economics contributed towards a growth in human welfare?
  8. What are the advantages and disadvantages of the trend for undergraduate economics curricula to become more mathematical (at least until relatively recently)?
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A bridge to somewhere

Many politicians throughout the world,
not just on the centre and left, are arguing for increased spending on infrastructure. This was one of the key proposals of Donald Trump during his election campaign. In his election manifesto he pledged to “Transform America’s crumbling infrastructure into a golden opportunity for accelerated economic growth and more rapid productivity gains”.

Increased spending on inffrastructure has both demand- and supply-side effects.

Unless matched by cuts elsewhere, such spending will increase aggregate demand and could have a high multiplier effect if most of the inputs are domestic. Also there could be accelerator effects as the projects may stimulate private investment.

On the supply side, well-targeted infrastructure spending can directly increase productivity and cut costs of logistics and communications.

The combination of the demand- and supply-side effects could increase both potential and actual output and reduce unemployment.

So, if infrastructure projects can have such beneficial effects, why are politicians often so reluctant to give them the go-ahead?

Part of the problem is one of timing. The costs occur in the short run. These include demolition, construction and disruption. The direct benefits occur in the longer term, once the project is complete. And for complex projects this may be many years hence. It is true that demand-side benefits start to occur once construction has begun, but these benefits are widely dispersed and not easy to identify directly with the project.

Then there is the problem of externalities. The external costs of projects may include environmental costs and costs to local residents. This can lead to protests, public hearings and the need for detailed cost–benefit analysis. This can delay or even prevent projects from occurring.

The external benefits are to non-users of the project, such as a new bridge or bypass reducing congestion for users of existing routes. These make the private construction of many projects unprofitable, except with public subsidies or with public–private partnerships. So there does need to be a macroeconomic policy that favours publicly-funded infrastructure projects.

One type of investment that is less disruptive and can have shorter-term benefits is maintenance investment. Maintenance expenditure can avoid much more costly rebuilding expenditure later on. But this is often the first type of expenditure to be cut when public-sector budgets as squeezed, whether at the local or national level.

The problem of lack of infrastructure investment is very much a political problem. The politicians who give the go-ahead to such projects, such as high-speed rail, come in for criticisms from those bearing the short-run costs but they are gone from office once the benefits start to occur. They get the criticism but not the praise.

Articles

Are big infrastructure projects castles in the air or bridges to nowhere? The Economist, Buttonwood’s notebook (16/1/17)
Trump’s plans to rebuild America are misguided and harmful. This is how we should do it. The Washington Post, Lawrence H. Summers (17/1/17)

Questions

  1. Identify the types of externality from (a) a new high-speed rail line, (b) new hospitals.
  2. How is discounting relevant to decisions about public-sector projects?
  3. Why are governments often unwilling to undertake (a) new infrastructure projects, (b) maintenance projects?
  4. Is a programme of infrastructure investment necessarily a Keynesian policy?
  5. What accelerator effects would you expect from infrastructure investment?
  6. Explain the difference between the ‘spill-out’ and ‘pull-in’ effects of different types of public investments in a specific location. Is it possible for a project to have both effects?
  7. What answer would you give to the teacher who asked the following question of US Treasury Secretary, Larry Summers? “The paint is chipping off the walls of this school, not off the walls at McDonald’s or the movie theatre. So why should the kids believe this society thinks their education is the most important thing?”
  8. What is the ‘bridge to nowhere’ problem? Why does it occur and what are the solutions to it?
  9. Why is the ‘castles in the air’ element of private projects during a boom an example of the fallacy of composition?
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CMA imposes record fine

The Competition and Markets Authority (CMA) has imposed a record fine of £84m on the American pharmaceutical manufacturing company Pfizer and of £5.2m on its UK distributor, Flynn Pharma. The CMA found that the companies charged unfair prices to the NHS for phenytoin sodium capsules, the anti-epilepsy drug.

The price was previously regulated, but Pfizer deliberately de-branded the drug in September 2012 and immediately raised the price to Flynn Pharma by between 780% and 1600%, which, in turn, raised the price to the NHS by nearly 2600%. This made the drug many times more expensive than in any other European country.

The cost to the NHS rose from around £2m per year to around £50m in 2013. Although other generic drugs are available, there would be serious health risks to patients forced to switch drugs. The NHS thus had no alternative to paying the higher price.

Pfizer claimed that the drug was loss-making before it was de-branded. However, the CMA calculated that this did not justify the size of the price increase; that the higher price enabled Pfizer to recover all these claimed losses within just two months.

The usual practice is for pharmaceutical companies to charge high prices for new drugs for a period of time to enable them to recover high research and development costs. Later, the drugs become available as generic drugs that other manufacturers can produce. The price then normally falls dramatically.

Phenytoin sodium was invented many years ago and there has been no recent innovation and no significant investment. But, unlike with many other drugs, there has been no switching by the NHS because of possible dangers to patients. This has given Pfizer and its distributor considerable market power. As the CMA states in its press release:

Epilepsy patients who are already taking phenytoin sodium capsules should not usually be switched to other products, including another manufacturer’s version of the product, due to the risk of loss of seizure control which can have serious health consequences. As a result, the NHS had no alternative to paying the increased prices for the drug.

In conclusion, the CMA found that “both companies have held a dominant position in their respective markets for the manufacture and supply of phenytoin sodium capsules and each has abused that dominant position by charging excessive and unfair prices”.

Articles

Pfizer fined record £84.2m for overcharging NHS 2600% Independent, Zlata Rodionova (7/12/16)
Pfizer fined record £84.2m over NHS overcharging The Guardian, Angela Monaghan (7/12/16)
CMA fines drug firms £90m for over-charging NHS nhe (7/12/16)
Pfizer hit with record fine after hiking price of NHS epilepsy drug by 2,600pc – costing taxpayer millions The Telegraph (7/12/16)
Pfizer, Flynn Get Record Fine on 2,600% Drug Price Increase Bloomberg, Patrick Gower (7/12/16)

CMA publications
Phenytoin sodium capsules: suspected unfair pricing Competition and Markets Authority: Case reference: CE/9742-13, Competition and Markets Authority cases (updated 7/12/16)
CMA fines Pfizer and Flynn £90 million for drug price hike to NHS CMA Press Release (7/12/16)

Questions

  1. What are the arguments for drug companies being allowed to charge high prices for new drugs?
  2. How long should these high prices persist?
  3. Sketch a diagram to illustrate Pfizer’s price for its anti-epilepsy drug before and after it was de-branded. Illustrate the effect on Pfizer’s profits from the drug.
  4. What determines the price elasticity of demand for (a) a drug which is branded and unique; (b) a drug produced by a specific producer but which is generic and can be produced by a number of producers; (c) a generic drug produced by many producers?
  5. How should a regulator like the CMA decide what price a firm with market power should be allowed to charge?
  6. Under what legislation did the CMA fine Pfizer and Flynn Pharma? What is the upper limit to the fine it is able to impose? Did it impose the maximum fine on Pfizer?
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Going nuclear

The UK government has finally given the go-ahead to build the new Hinkley C nuclear power station in Somerset. It will consist of two European pressurised reactors, a relatively new technology. No EPR plant has yet been completed, with the one in the most advanced stages of construction at Flamanville in France, having experienced many safety and construction problems. This is currently expected to be more than three times over budget and at least six years behind its original completion date of 2012.

The Hinkley C power station, first proposed in 2007, is currently estimated to cost £18 billion. This cost will be borne entirely by its builder, EDF, the French 85% state-owned company, and its Chinese partner, CGN. When up and running – currently estimated at 2025 – it is expected to produce around 7% of the UK’s electricity output.

On becoming Prime Minister in July 2016, Theresa May announced that the approval for the plant would be put on hold while further investigation of its costs, benefits, security concerns, technological issues and safeguards was conducted. This has now been completed and approval has been granted subject to new conditions. The main one is that the government “will be able to prevent the sale of EDF’s controlling stake prior to the completion of construction”. This will allow the government to prevent change of ownership during the construction phase. Thus, for example, EDF, would not be allowed to sell its share of Hinkley C to CGN, which currently has a one-third share in the project. EDF and CGN have accepted the new terms.

After Hinkley the government will have a ‘golden share’ in all future nuclear projects. “This will ensure that significant stakes cannot be sold without the Government’s knowledge or consent.”

In return for their full financing of the project, the government has guaranteed EDF and CGN a price of £92.50 per megawatt hour of electricity (in 2012 prices). This price will be borne by consumers. It will rise with inflation from now and over the first 35 years of the power station’s operation. It is expected that the Hinkley C will have a life of 60 years.

Critics point out that this guaranteed ‘strike price’ is more than double the current wholesale price of electricity and, with the price of renewables falling as technology improves, it will be an expensive way to meet the UK’s electricity needs and cut carbon emissions.

Those in favour argue that it is impossible to predict electricity prices into the distant future and that the certainty this plant will give is worth the high price by current standards.

To assess the desirability of the plant requires an assessment of its costs and benefits. In principle, this is a relatively simple process of identifying and measuring the costs and benefits, including external costs and benefits; discounting future costs and benefits to give them a present value; weighting them by their probability of occurrence; then calculating whether the net present value is positive or negative. A sensitivity analysis could also be conducted to show just how sensitive the net present value would be to changes in the value of specific costs or benefits.

In practice the process is far from simple – largely because of the huge uncertainty over specific costs and benefits. These include future wholesale electricity prices, unforeseen problems in construction and operation, and a range of political issues, such as pressure from various interest groups, and attitudes and actions of EDF and CGN and their respective governments, which will affect not only Hinkley C but other future power stations.

The articles look at the costs and benefits of this, the most expensive construction project ever in the UK, and possibly on Earth..

Articles

Hinkley Point: UK approves nuclear plant deal BBC News (15/9/16)
Hinkley Point: What is it and why is it important? BBC News, John Moylan (15/9/16)
‘The case hasn’t changed’ for Hinkley Point C BBC Today Programme, Malcolm Grimston (29/7/16)
U.K. Approves EDF’s £18 Billion Hinkley Point Nuclear Project Bloomberg, Francois De Beaupuy (14/9/16)
Hinkley Point C nuclear power station gets government green light The Guardian, Rowena Mason and Simon Goodley (15/9/16)
Hinkley Point C: now for a deep rethink on the nuclear adventure? The Guardian, Nils Pratley (15/9/16)
Hinkley Point C finally gets green light as Government approves nuclear deal with EDF and China The Telegraph, Emily Gosden (15/9/16)
UK gives go-ahead for ‘revised’ £18bn Hinkley Point plant Financial Times, Andrew Ward, Jim Pickard and Michael Stothard (15/9/16)
Hinkley Point: Is the UK getting a good deal? Financial Times, Andrew Ward (15/9/16)
Hinkley Point is risk for overstretched EDF, warn critics Financial Times, Michael Stothard (15/9/16)
Hinkley C must be the first of many new nuclear plants The Conversation, Simon Hogg (16/9/16)

Report

Nuclear power in the UK National Audit Office, Sir Amyas Morse, Comptroller and Auditor General (12/7/16)

Questions

  1. Summarise the arguments for going ahead with Hinkley C.
  2. Summarise the objections to Hinkley C.
  3. What categories of uncertain costs and uncertain benefits are there for the project?
  4. Is the project in EDF’s interests?
  5. How will the government’s golden share system operate?
  6. How should the discount rate be chosen for discounting future costs and benefits from a project such as Hinkley C?
  7. What factors will determine the wholesale price of electricity over the coming years? In real terms, do you think it is likely to rise or fall? Explain.
  8. If nuclear power has high fixed costs and low marginal costs, how does this affect how much nuclear power stations should be used in a situation of daily and seasonal fluctuations in demand?
  9. How could ‘smart grid’ technology smooth out peaks and troughs in electricity supply and demand? How does this affect the relative arguments about nuclear power versus renewables?