Consider a pop music concert. For reasons that we do not necessarily have to go into, pop music stars do not always want to charge the highest possible (single-concert profit-maximizing) prices for tickets to their concerts. In fact ticket prices are often so “low” (I still find them rather expensive) that many more people would like to go to the concert (at these prices) than there are tickets. The economic term for this is that tickets are being “rationed”. What is the result of such rationing?
If tickets are sold offline in a single “brick-and-mortar”, as people like to say, ticket booth, then we get long queues and people starting to queue at 2am of the morning of the day ticket sales begin or they even get there earlier and camp out with sleeping bags. If the selling is done online, then you have about one second in which you can buy your ticket, with many people with a slower internet connection missing out. Is the final ticket allocation in such cases of rationing Pareto-efficient? Think about it.
Well, the answer is “it depends”. If we keep the prices of tickets fixed and if we do not allow resale of tickets at any other price, then one could possibly call this allocation Pareto-efficient. Nobody who has a ticket would be willing to sell it on for the same price that they bought it for (unless circumstances change). After all, they spent possibly many hours to get a ticket. So there does not seem a Pareto improvement away from this ticket allocation. But what if we do allow resale of tickets at possibly different prices? Well, then it is possible that someone who has a ticket is willing to sell it at a higher price and someone who does not have a ticket is willing to buy it at a higher price. If they (voluntarily) come to an agreement of some price at which the ticket is sold from the former to the latter, we have a Pareto improvement.
And this seems to happen a lot. According to a Singapore Straits Times (a somewhat random choice) article from October 28 2018, for instance, tickets to a 2017 Coldplay concert were priced between $78 and $298 ($ = Singapore Dollar = roughly 64 Euro cents), while tickets were sold in the “secondary market” through craigslist for $800. For an Ed Sheeran concert, also in Singapore, the author of the article found a $248 ticket priced at $13.500 on some ticket reselling site. At the time of the writing of this article another Ed Sheeran concert, scheduled for April 2019, had just opened (and I guess quickly closed) ticket sales and a $248 ticket was being offered already in October 2018 for $3.365,90. This is despite all sorts of efforts on behalf of the musicians to make resale impossible or at least hard. Taylor Swift, for instance, makes ticket buyers watch some of her music videos first, before they can purchase a ticket, in an effort, I guess, to prevent automatic “bots” buying tickets. Another option is that ticket holders have their name printed on the ticket and have to show a passport to get in. This is quite expensive and time consuming for the operators of the concert theater, though.
In any case, why are the musicians so unhappy about these Pareto-improvements? Well, I guess they might not mind so much if their real fans buy tickets in the first place and then sell them on to other real fans that are willing to pay more for the ticket. But this is not what happens, of course. The people buying the initially cheap tickets are probably not real fans, they are probably (technically capable) opportunists who see, well, an opportunity to make money (almost risk-free, so it is almost arbitrage – although I could not do it). If that’s the case, the musicians would probably prefer to sell the tickets for higher prices themselves, but what they really seem to want is to make sure that their real fans can buy these tickets relatively cheaply. So as long as there is no completely satisfactory technical solution with which this can be done, pop musicians and their fans are losing their fight against the logic of the market, one could say.
But my point is a different one. I want to ask you this. If we allow people to sell and buy tickets at any price, what would be a Pareto-optimal allocation? Take your time to think about it.
I am afraid that the only Pareto-efficient allocation of tickets (if we allow money in the economy, with which one can buy other things – so money is valuable) is this: the tickets go to the people with the highest willingness to pay for them. If we have an allocation for which this is not true, then we can find two people, one who has a ticket and one who does not, with the latter a higher willingness to pay for the ticket than the former, and a Pareto improvement is possible. Let me again reiterate that Pareto-efficiency has nothing to do with fairness.
Does this mean that this allocation, in which the tickets go to the people who have the highest willingness to pay for them, is a Pareto improvement over the allocation that you get from rationing and queuing? The answer is most likely “no”. Why? Suppose that tickets are sold much more expensively by the musicians themselves such that there are just as many people interested in tickets (at this high price) as there are tickets. Think about a person who does not have a sufficiently high willingness to pay for tickets at this price but would have gotten their ticket in the rationing situation through long queuing. This person is now clearly worse off.