Friday, April 08, 2011

Violent Torpedo of Falling Prices

We asked for the truth from Charlie Sheen, and we got it; well, with respect to his tour, that is. In mid-March, he tweeted that the first two concerts on his Violent Torpedo of Truth Tour ” had sold out in a matter of minutes. Although Charlie Sheen was telling the truth about his first two concerts, the activity in the secondary market suggested that empty seats were still likely. Upon further analysis, it appears as if scalpers (not Sheen’s cadre of supporters) made up a large percentage of buyers at the box office, with high hopes that demand for tickets would soar in the secondary market.

Once there were no tickets left at the box office, interested customers who still wanted to see Charlie Sheen were forced to purchase resold tickets at prices higher than their original value. At first, some scalpers looking to make a quick profit posted tickets for Sheen’s performance online at heavy markups. Some scalpers sold their tickets and made a profit, while other scalpers held on to what they had or even bought more tickets in the secondary market with the expectation that ticket prices would continue to rise.

However, about a quarter of the tickets for Sheen’s first appearance were still available just days before the show. As the performance neared, there was a change in expectations, and thus behavior, by ticket holders. Since the scalpers were never interested in actually seeing Sheen perform, they were concerned that the window of opportunity to make a profit was closing. Prices were no longer expected to increase.

The graph to the left illustrates the initial supply (S1) and demand (D1) curves in the secondary market for Sheen tickets. The change in expectation by scalpers meant that ticket-buying scalpers left the market, causing a leftward shift in the demand curve (as seen in the shift from D1 to D2). As ticket prices fell and time was running out, those scalpers still holding on to tickets rushed to the market to get rid of their remaining tickets. This led to the increase in the amount of tickets supplied in the secondary market (as illustrated in the shift from S1 to S2). As a result, the price of resale tickets plummeted, and many scalpers ended up in the red. On, tickets for Sheen’s performance fell as low as $14. That is, they were selling for well below their original value at prices where many scalpers lost money on every ticket they sold. Clearly scalpers’ expectations about consumers willing to see Charlie Sheen were initially out of sync with reality. But with his wallet unaffected by fluctuations in the secondary ticket market, it is fair to say that Charlie Sheen is the one who ended up winning.

Discussion Questions:

  1. Are ticket scalpers behaving optimally by agreeing to sell tickets for less than they paid? Explain the scalper’s profit-maximizing behavior.
  2. Suppose beer is a complementary good to Charlie Sheen’s live show. If the price of booze went down significantly in Detroit the week before the show, what effect would this have on the demand for tickets to Sheen’s show?
  3. Suppose a stand-up comedy show performed by Chris Rock would be a substitute good to Charlie Sheen’s live show. Suppose Rock already had one show scheduled in Detroit the night of Sheen’s show, but then Rock announced that he would add a second show that night. How would an increased supply of tickets to see Rock’s show affect the market for tickets to see Sheen?
  4. Reviews of Sheen’s first show were reportedly quite bad, and Sheen was even booed. How would this news affect the market for Sheen tickets in other cities on his tour?

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