If you want a ticket for an event, such as a match or a concert, but the tickets are sold out, what do you do? Many will go to an agency operating in the ‘secondary market’. A secondary market is where items originally purchased new, such as tickets, company shares, cars or antiques, are put up for sale at a price that the market will bear.
The equilibrium price in a secondary market is where supply equals demand and the actual price will approximate to this equilibrium. In the case of tickets, this equilibrium price can be much higher than the original price sold by the venue or its agents. The reason is that the original price is below the equilibrium.
This is illustrated in the figure (click here for a PowerPoint). Assume that the total supply of tickets is Qs. Assume also that the official box office price is Pbo
and that demand is given by the demand curve D. At the box office price demand exceeds supply by Qd – Qs. There is thus a shortage, with many fans unable to obtain a ticket at the official price. Many of you will be familiar with having to be as quick as possible to get hold of tickets where demand considerably outstrips supply. Events such as Glastonbury sell out within seconds of coming on sale.
If you buy a ticket and then find out you cannot go to the event, you can sell the ticket on the secondary market through an online site or agency. Such agencies could be seen as providing a useful service as it means that otherwise empty seats will be filled. But if the equilibrium price is well above the original ticket price, there is the potential for huge gain by the agencies, who may pay the seller considerably less than the agency then sells the ticket to someone else.
What is more, the difference between the original price and the equilibrium price in the secondary market makes ticket touting, or ticket ‘scalping’, highly profitable. This is where people buy tickets with no intention of using them themselves but in order to sell them at much higher prices on the secondary market. Such ticket touting has been illegal for football matches since 1994 and was illegal for the 2012 London Olympics, but it is legal for plays, concerts, festivals and other events.
Ticket touts are often highly organised in obtaining tickets at official prices by buying early and using multiple credit cards and multiple identities to avoid systems that restrict the number of tickets issued to a card. They often use internet bots to mass purchase tickets the moment they go on sale.
Those in favour of ticket touting argue that the high price in the secondary market is just a reflection of demand and supply (see the IEA article below). Ticket touting allows tickets to be directed to people who value them most and will get the greatest benefit from it. What is more, banning ticket touting, so the argument goes, would simply drive it underground.
Those against argue on grounds of equity. Ticket prices set below the equilibrium are designed to give greater equality of access to fans. Rationing on a first-come first-served system, either on the internet or by a queue, is seen to be fairer than one by ability/willingness to pay. A poor person may be just as keen to go to an event as a rich person and gain just as much enjoyment from it, but cannot afford the high equilibrium price. What is more, non of the profit from the higher prices reaches the event organisers or the artists or players. Yet the mark-up and hence profit made by ticket touts can be massive, as the first Observer article below shows.
Various measures are being tried to prevent ticket touting. One is the use of paperless tickets, with the number of tickets limited per person and with people having to show their ticket on their phones along with ID at the door or gate. If a person cannot attend, then the solution is a system where they can give the ticket back to the box office (perhaps electronically) which will re-sell it for them at the official price.
A government-backed investigation, the Waterson review reported in May 2016 and recommended that touts should be licensed and that there should be harsher penalties for firms that flout consumer rights law as applying to ticket sales. Whether this would be sufficient to bring secondary market prices down significantly, remains to be seen. In the meantime, organisers do seem to be trying to find ways of beating the touts through smarter means of selling.
Articles
MP Nigel Adams calls for secondary ticket marketing to be reformed Music Week, James Hanley (14/9/16)
Iron Maiden go to war with ticket touts BBC News, Mark Savage (22/9/16)
The new age of the ticket tout BBC World Tonight, Andrew Hosken (25/5/16)
Government urged to help music industry tackle ticket touts The Guardian, Rob Davies (13/9/16)
Ticket touts face licensing threat The Guardian, Rupert Jones (26/5/16)
How the ticket touts get away with bleeding fans dry The Observer, Rob Davies and Rupert Jones (15/5/16)
What sorcery is this? A £140 ticket for new Harry Potter play now costs £8,327 The Observer, Rob Davies and Laurie Chen (14/8/16)
Ticket touts made $3m from the last Mumford & Sons tour. $0 went back to the music industry. Music Business Woldwide, Adam Tudhope (6/9/16)
This is tout of order – join the Daily Mirror campaign to beat rip-off ticket resales Daily Mirror, Nada Farhoud (19/9/16)
Ticket touts: A muggle’s game The Economist (20/8/16)
Can We Fight Back Against The Robot Touts Ruining Live Music? Huffington Post, Andy Webb (6/9/16)
In defence of ticket touts Institute of Economic Affairs, Steve Davies (25/2/15)
Report
Consumer protection measures applying to ticket resale: Waterson review Department for Business, Innovation & Skills and Department for Culture, Media & Sport 26/5/16)
Guide
#Toutsout MMF & FanFair Alliance September 2016
Questions
- Why can ticket touts sell tickets above the equilibrium price shown in the diagram?
- In what ways could ticket touts be said to be distorting the market?
- How do ticket touts reduce consumer surplus? Could they reduce it to zero?
- Why may allowing ticket touting to take place result in empty seats at concerts or other events?
- 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
- How does the price elasticity of demand influence the mark-up that ticket touts can make? Illustrate this on a diagram similar to the one above.
- Is it in ticket touts’ interests to adjust prices as an event draws closer, just as budget airlines adjust seat prices as the plane fills up? Could organisers sell tickets in the primary market in this way with prices rising as the event fills up?
- Discuss the various ways in which the secondary ticket market could be reformed? To what extent do these involve reforms in the primary ticket market?
Your Americano, Latte or Cappuccino may soon be more expensive. This is because coffee bean prices are rising. A combination of continuing growth in demand and poor coffee harvests in various parts of the world have led to a rise in both Arabica and Robusta prices, with the International Coffee Organization’s Composite Indicator price (in US dollars) having risen by over 30% since mid-January this year (see chart below: click here for a PowerPoint)
Supply has been affected by droughts in Brazil and Vietnam, two of the world’s biggest coffee producers, and by pests (the Coffee Berry Borer) in the Kilimanjaro region of Tanzania and in other East African countries. Global exports of coffee in July 2016 were 22% down on the same month in 2015.
The growing shortage and rising current (spot) prices is reflected in future prices. 
These are prices determined in the market now for trading at a specified future date (e.g. in three months’ time). Future prices depend on predictions of the balance of demand and supply in the future. According to the MarketWatch article below, “Analysts at Société Générale in a note predicted that prices could climb about 30% further by the end of next year”. The current (mid-September) spot price of robusta coffee beans is around $0.96 per lb. The December 2016 future price is around $1.48.
So what effect will this have on the prices in Starbucks, Costa or Caffè Nero? And what effect will it have on ground or instant coffee in supermarkets? To quote the MarketWatch article again:
A research report from the US Department of Agriculture found that, on average, a 10% increase in green-coffee-bean prices per pound would yield a 2% increase in both manufacturer prices and at the register in places like Starbucks Corp.
This is because the cost of coffee beans is just one element in the costs of coffee roasters and coffee shops. Also these companies use futures markets to smooth out the prices they pay. They hold stockpiles of coffee, which they build up when prices are low and draw on when prices are high. This helps to reduce fluctuations in retail prices.
So don’t worry too much about the price of your morning coffee – at least, not yet.
Articles
Why a surge in coffee-bean prices may not hit the Starbucks set—yet MarketWatch, Rachel Koning Beals (9/9/16)
Wired coffee prices may not slip far News Markets, David Cottle (9/9/16)
Late-harvest woes prompt Brazil coffee harvest downgrade Agrimoney (7/9/16)
Look Out, Latte Lovers: Brazil Drought Hurts Espresso Beans Bloomberg, Fabiana Batista and Marvin G. Perez (13/9/16)
Why Your Morning Coffee Is About to Become Even More Expensive Fortune (28/7/16)
Climate change brews a storm for East Africa coffee farmers Business Daily (East Africa), Paul Redfern (4/9/16)
Coffee Market Report ICO (August 2016)
Data
Commodity Prices Index Mundi
Historical Data on the Global Coffee Trade ICO
ICO’s Coffee Trade Statistics Infographic for July 2016 ICO blog (31/8/16)
Questions
- What determines coffee futures prices?
- How are the price fluctuations of coffee in coffee shops related to the price elasticities of demand and supply? What determines these elasticities?
- Why does a strengthening (an appreciation) of the currency of a coffee exporter affect (a) the price of coffee to producers in the country; (b) international coffee prices in dollars?
- Are poor coffee harvests on balance good or bad for coffee producers? How does this depend on the market price elasticity of demand? Does the answer vary from producer to producer?
- How does speculation affect coffee prices (both spot and future)? Is such speculation of benefit to (a) the coffee consumer; (b) the coffee grower?
According to the BBC’s Joe Lynam, “Britain has the most competitive and dynamic retail environment in the world, which attracts shoppers globally.” It is perhaps this fact which may save BHS, with new owners being attracted by such an opportunity. BHS is soon expected to file for administration, with debts of more than £1.3 billion and having failed to secure the loan needed to keep it afloat. If this company collapses, it will bring an end to the life of an 88 year old giant.
The British retail scene has certainly changed over the past decade, with names such as Woolworths and Comet disappearing – could BHS be the next casualty of the changing retail climate? In the world of retail, tastes change quickly and those stores who fail to change with the times are the ones that suffer. One of the factors behind the downfall of BHS is the ‘dated’ nature of its stores and fashions. As clothing outlets such as Zara, Oasis and Next have continued to change with the times, commentators suggest that BHS continues with a trading offer from the 1980s. With the online shopping trend, many household names adapted their strategy, but BHS failed to do so and the second chance that BHS asked the public for when Sir Philip Green, its former owner, sold BHS in 2015 hasn’t materialised.
With administrators ready to be brought in and thousands of jobs hanging in the balance, the administrators will be looking at methods to attract funding, new owners or so-called ‘cherry pickers’ who may be interested in buying up the more profitable stores. Some of their stores remain in prime locations and deliver a tidy profit and it is perhaps these gems, together with the tradition that British Home Stores brings that may yet see the company saved. The outcome for BHS will not only affect the jobs of its employees, but will affect the pensions of thousands of workers. The BHS pension fund currently has a deficit of £576 million and so the Pension Protection Fund will have to look closely at the situation before thinking about issues a contribution notice to those connected with the fund.
A deal was on the cards last week, with BHS owner Dominic Chappell in talks with Mike Ashley’s Sports Direct, but the high debts and pensions deficit appears to have deterred this deal. The failing fortunes of BHS have now come back to haunt former owner, Sir Philip Green, who in March 2015, sold the business for just £1. Sir Philip may return to save the day, but the options for this once giant of the British high street are rather limited. The following articles consider the fortunes of BHS.
BHS seeks Sports Direct lifeline as it heads for collapse The Guardian, Graham Ruddick (24/04/16)
BHS expected to file for administration on Monday BBC News (25/04/16)
Thousands of BHS workers face anxious wait amid administration fears The Telegraph (25/04/16)
BHS administration: ‘Imminent bankruptcy’ puts 11,000 jobs at risk Independent, Peter Yeung (25/04/16)
Up to 11,000 jobs face the axe as BHS is expected to announce collapse of chain after efforts to find rescuer failed Mail Online, Neil Craven (24/04/16)
BHS nears collapse putting 11,000 jobs at risk Sky News (25/04/16)
BHS set to file for administration after sales talks fail Financial Times, Murad Ahmed (25/04/16)
Questions
- Using a demand and supply diagram, can you explain some of the factors that have contributed to the difficult position that BHS finds itself in?
- Now, can you use a diagram showing revenues and profits and explain the current position of BHS?
- What type of market structure does BHS operate in? Can this be used to explain why it is in its current position?
- How has the company failed in adapting its business strategy to the changing times?
- Looking back at the history of BHS, can you apply the product life cycle to this store?
- If another company is considering purchasing BHS, or at least some of its stores, what key information will it need and what might make it likely to go ahead with such a purchase?
In many cases, we simply leave the market to do what it does best – equate demand with supply and from this we get an equilibrium price and the optimal quantity. But, what happens if either the price or quantity is ‘incorrect’? What happens if the market fails to deliver an efficient outcome? In this case, we look to governments to intervene and ‘correct’ the market and such intervention can take place on the demand and/or supply-side. One area where it is generally felt that government intervention is needed is drugs and the trafficking of them across borders.
There are many ways in which governments have tried to tackle the problem of drug usage. The issue is that drugs are bad for individuals, for the community, society and the economy. Too much is produced and consumed and hence we have a classic case of market failure and this justifies government intervention.
But, how should governments intervene? With a substance such as drugs, we have an inelastic demand with resepect to price – any increase in price leads to only a small decrease in quantity. So any policy implemented by governments that attempts to change the market price will have limited effect in restricting demand. With globalisation, drugs can be moved more easily across borders and hence global co-operation is needed to restrict the flow. The article below considers the area of drugs and drug trafficking and looks at some of the policy options open to government.
Narconomics: The business of drug trafficking Houston Chronicle (16/3/16)
Questions
- Why does the market fail in the case of drug trafficking?
- Draw the demand curve you would expect for drugs and use this to explain why an increase in price will have limited effect on demand.
- Is there an argument for making drugs legal as a means of raising tax revenue?
- If better educational programmes are introduced about the perils of drug usage, how would this affect the market? Use a demand and supply diagram to help explain your answer.
- Why does globalisation make the solutions to drug trafficking more difficult to implement?
- Could drug usage and drug trafficking and hence the need to invest more money in tackling the problem actually boost an economy’s rate of growth? If so, does this mean that we should encourage drug usage?
People are beginning to get used to low oil prices and acting as if they are going to remain low. Oil is trading at only a little over $30 per barrel and Saudi Arabia is unwilling to backtrack on its policy of maintaining its level of production and not seeking to prevent oil prices from falling. Currently, there is still a position of over supply and hence in the short term the price could continue falling – perhaps to $20 per barrel.
But what of the future? What will happen in the medium term (6 to 12 months) and the longer term? Investment in new oil wells, both conventional and shale oil, have declined substantially. The position of over supply could rapidly come to an end. The Telegraph article below quotes the International Energy Agency’s executive director, Fatih Birol, as saying:
“Investment in oil exploration and production across the world has been cut to the bone, falling 24% last year and an estimated 17% this year. This is… far below the minimum levels needed to keep up with future demand. …
It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts raise the odds of unpleasant oil security surprises in the not too distant future.”
And in the Overview of the IEA’s 2016 Medium-Term Oil Market Report, it is stated that
In today’s oil market there is hardly any spare production capacity other than in Saudi Arabia and Iran and significant investment is required just to maintain existing production before we move on to provide the new capacity needed to meet rising oil demand. The risk of a sharp oil price rise towards the later part of our forecast arising from insufficient investment is as potentially de-stabilising as the sharp oil price fall has proved to be.
The higher-cost conventional producers, such as Venezuela, Nigeria, Angola, Russia and off-shore producers, could take a long time to rebuild capacity as investment in conventional wells is costly, especially off-shore.
As far as shale oil producers is concerned – the prime target of Saudi Arabia’s policy of not cutting back supply – production could well bounce back after a relatively short time as wells are re-opened and investment in new wells is resumed.
But, price rises in the medium term could then be followed by lower prices again a year or two thereafter as oil from new investment comes on stream: or they could continue rising if investment is insufficient. It depends on the overall balance of demand and supply. The table shows the IEA’s forecast of production and consumption and the effect on oil stocks. From 2018, it is predicting that consumption will exceed production and that, therefore, stocks will fall – and at an accelerating rate.
But just what happens to the balance of production and consumption will also depend on expectations. If shale oil investors believe that an oil price bounce is temporary, they are likely to hold off investing. But this will, in turn, help to sustain a price bounce, which in turn, could help to encourage investment. So expectations of investors will depend on what other investors expect to happen – a very difficult outcome to predict. It’s a form of Keynesian beauty contest (see the blog post A stock market beauty contest of the machines) where what is important is what other people think will happen, which in turn depends on what they think other people will do, and so on.
Webcast
At $30 oil price, shale rebound may take much, much longer CNBC, Patti Domm , Bob Iaccino, Helima Croft and Matt Smith (25/2/16)
Article
Opec has failed to stop US shale revolution admits energy watchdog The Telegraph, Ambrose Evans-Pritchard (27/2/16)
Report
Medium-term Oil Market Report 2016: Overview International Energy Agency (IEA) (22/2/16)
Questions
- Using demand and supply diagrams, demonstrate (a) what happened to oil prices in 2015; (b) what is likely to happen to them in 2016; (c) what is likely to happen to them in 2017/18.
- Why have oil prices fallen so much over the past 12 months?
- Using aggregate demand and supply analysis, demonstrate the effect of lower oil prices on a national economy.
- What have have been the advantages and disadvantages of lower oil prices? In your answer, distinguish between the effects on different people, countries and the world generally.
- Why is oil supply more price elastic in the long run than in the short run?
- Why does supply elasticity vary between different types of oil fields (a) in the short run; (b) in the long run?
- What determines whether speculation about future oil prices is likely to be stabilising or destabilising?
- What role has OPEC played in determining the oil price over the past few months? What role can it play over the coming years?
- Explain the concept of a ‘Keynesian beauty contest’ in the context of speculation about future oil prices, and why this makes the prediction of future oil prices more difficult.
- Give some other examples of human behaviour which is in the form of a Keynesian beauty contest.
- Why may playing a Keynesian beauty contest lead to an undesirable Nash equilibrium?
