Scarlet and Gray (And a Little Green, Too)

I don't know what I did to deserve such good fortune, but for some reason, God saw fit to allow me to be born in the state of Ohio. Growing up a Buckeye, you learn early in life that blue is a four-letter word (maize might as well be also), and that all good things come packaged in red sweater vests.

It is also my good fortune that Ohio State will be playing the college football national championship game in New Orleans this January, as I will be in town attending the ASSA meetings*, and thus will naturally be attending the game shortly thereafter.

The teams are set: OSU vs. LSU. The only big question left is—what will I pay for the privilege of watching them duke it out? I'm not counting on getting a ticket from the lottery drawing, so I plan to buy a ticket from a reseller. For your typical fan, buying tickets from resellers is the norm for big games like this. It is not uncommon for these tickets to be sold for 5 to 10 times their face value in the resale market.

Some games are unexpectedly good (see Browns vs. Bills this Sunday in an unlikely battle for a playoff spot, or the recent Missouri vs. Kansas game as #1 and #2). With these games, it's easy to see why the resale market would dominate—most tickets were sold cheaply early in the season before anyone realized the game would be so meaningful. When demand rises, so do prices.

The explanation isn't so straightforward, however, for games that are guaranteed to be important (like the national championship). In this article, ESPN writer Gregg Easterbrook discusses some reasons why tickets are still sold by sports teams at face value, regardless of expected market rates.

*A big economics conference. There is a good chance your professor is going. Maybe they'll buy you a hat.

Discussion Questions

1. Fairness is always an issue with pricing decisions. Easterbrook calls it a “public relations move” to keep prices standard. Might raising prices for important games create resentment that could extend forward into the months and years to come?

2. In his autobiographical Fever Pitch, Nick Hornby writes that club owners would be daft to raise prices beyond what their rabid fans can readily afford, since the marginal fan comes to games as much to see and experience these crazed fans as to see the action on the field. How would raising the price affect the demographics of those who could attend? Do rabid fans confer a positive (or negative) externality on the rest of the crowd?

3. Last Monday night, Michael Vick and the Falcons took on Reggie Bush and the Saints in an epic battle for the NFC South. Oh, wait, nevermind—neither of these once-great teams is likely to even smell the playoffs this year, and neither of those players were even on the field to try and help the cause (Bush is injured, Vick is in prison). How might setting prices upfront allow teams to capture more total revenue on games that turn out to be duds?

PlayStation 3 and Arbitrage

Two weeks ago, thousands stood in line to be among the first to get their hands on the PlayStation 3. Surprisingly, many of these people who waited through the cold, rain, and snow did not actually want to keep the PS3. They wanted to buy it for $600 and sell it on eBay for twice the price--a profit-seeking behavior known as arbitrage.

Economists define arbitrage as the act of profiting without bearing any risk. A large shortage is the best indicator of an arbitrage opportunity. A shortage occurs when quantity demanded exceeds quantity supplied--in other words, when the number of PS3's that consumers are willing and able to buy at the current retail price exceeds the number of PS3's available in stores. A shortage implies that there are consumers willing to pay more than $600 for a PS3 who were unable to purchase one because they were too busy to stand in line or too far back in the line. Arbitrage is a means to allocate the PS3's from the initial buyers to the people who want them even more than the original buyers.

Discussion Questions

1. Sony should have forecasted the shortages and price bids on eBay for the PS3 because they sold out of other popular consoles when they were first released (PlayStation, PS2, and PSP). Would it be profitable for Sony to eliminate the "frenzy shortages" by pricing high during the first months and lowering prices afterwards? For example, they could charge $1,000 for the PS3 in November and December, but lower it to $600 afterwards.

2. Sony reports that it costs more than $600 to produce a PS3. Why would it be profitable for Sony to sell the PS3 at an initial loss?

3. Why would a gamer prefer to pay $1,200 for a PS3 on eBay rather than standing in line to buy one for $600?