Minnesota’s Economic News — W/E 1/28/22
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The Twins may have flamed out, but one Minnesota sports franchise is still in the hunt for play off glory. This Sunday, the Minnesota United play LA Galaxy in the MLS play offs.
Perhaps because residents of this state are so starved for sporting success, tickets are swapping hands for high prices. A ticket which you might have paid $29 for can, at the time of writing, be listed on Seat Geek for $85. There are complaints on Twitter about this ‘scalping’. But what is wrong with it?
How to build a demand curve
We could ask everyone in Minnesota what is the maximum they would pay for one of these tickets and line them up according to their answers, with the highest price on the left and the lowest on the right. We could represent our line as in the figure below. We’ve just built a demand curve for tickets.
How to build a supply curve
Now lets line up everybody in Minnesota who has a ticket. On the left, we have the person who is the most fanatical fan. They will only sell their ticket for a huge sum of money. On the right, we have someone who really isn’t too bothered. Maybe its cold, maybe they have plans. If they can’t use the ticket, they may actually be willing to sell their ticket for less than the $29 they paid for it. Better to sell it for $1 than not sell it at all. Either way, what we have now can be represented as in the figure below. We’ve just built a supply curve for tickets.
Introducing consumer and producer surplus
If we put these two lines on the same chart, we get the classic textbook graph shown below. Where the two lines meet, some quantity of of tickets (q) will be sold (by the people to the left of the green line) at some price (p) to buyers (who are also on the left of the green line). This is known as ‘equilibrium’.
But think about the people on the far left of the supply and demand curves. The buyer would have been willing to pay a much higher price than they did. If they were willing to pay, say, $100 and the price was $50, they have got a ‘consumer surplus’ of $50 (reservation price – price). The seller, on the other hand, would have been willing to sell their ticket for, say, $20, but ended up getting $50. They have got a ‘producer surplus’ of $30 (reservation price – price). This can be illustrated as on the chart below.
What is wrong with scalping?
With this framework in place, we can now answer our question, What is wrong with scalping?
If someone has a ticket which they are willing to sell for $85 and someone is willing to pay that for it, this is ‘scalping’. But we can see that it is simply a question of how the producer and consumer surplus is divided up. At a price of $85, if the buyer is willing to pay $100 and the seller will sell for any price above $20, the buyer’s consumer surplus is $15 ($100 – $85) and the seller’s producer surplus is $65 ($85 – $20). But if the seller decides not ‘scalp’ and sells the ticket for $29, their producer surplus falls to $9 ($29 – $20) and the buyer’s consumer surplus rises to $71 ($100 – $29).
What we are talking about is simply whether we have a situation where A) the buyer gets a consumer surplus of $15 and the seller gets a producer surplus of $65, or where B) the buyer gets a consumer surplus of $71 and the seller gets a producer surplus of $9. ‘Scalping’ is often framed as a moral issues, as though a preference for scenario A marks you out as selfish while a preference for scenario B is a sign of virtue. But it is hard to see why, from a moral standpoint, one of these scenarios is preferable to another.
You never hear sellers complain about ‘scalping’, only buyers. No doubt, they are keen to maximize their consumer surplus as the seller is to maximize their producer surplus. Morality is a handy ally to have in this quest.
John Phelan is an economist at the Center of the American Experiment.