The fundamental principles of economics are very simple, but it is an unending task to explain them and their implications in the face of widespread ignorance and hostility to the conclusions they lead to. We are seeing a classic example of this with the uproar over the way tickets to the Oasis concerts rose in price during the purchasing period, because the selling platform (Ticketmaster) employed ‘dynamic pricing’ software. As politicians are never averse to playing to the gallery of ill-informed and contradictory opinion, the Government has now announced a review into the use of dynamic pricing by vendors. Even for those clamouring for it, this can only bring bad results. It will not get them what they want because that is something impossible.

The fundamental reality that so many are busy denying is this. The number of seats at a concert or series of concerts (and hence tickets) is essentially fixed. In economic jargon, there is an almost perfectly inelastic supply. It does not matter how high the price is, you will not get additional supply. For concerts such as the Oasis ones where a lot of people want to go at the quoted price, there will not be enough tickets for everyone. This is inescapable. This means that there has to be a way of deciding who gets the tickets and who misses out. In other words, there has to be a way of allocating the fixed number of tickets between the much larger number of people who want them at the face value price.

There are several ways of doing this. The most efficient, which also maximises the revenue for both Oasis and the venues, is to use the price mechanism. In its pure version, the price of tickets would rise until it reached the level at which the number of people willing and able to pay that price was roughly the same as the number of tickets (the market clearing price). In this case (but not in most), this would mean that only those with the money would be able to go.

If you do not want that, there are alternatives. The tickets could be allocated by a lottery draw. They could be assigned by queuing, either physically at box offices or (as happened) by waiting on a telephone call or in a virtual waiting room. If you want to prevent tickets acquired that way from being resold, then you could say that people would have to show ID and the credit card used to gain entry.

Both of the latter two methods are forms of rationing. In both cases, the majority will not get tickets. Neither of them is inherently fairer than using the ability to pay – they simply use a different criterion. In the first case, the lucky get tickets, in the second case, some of those prepared to invest significant time will get them. There is no possible world in which everyone who wants a ticket at the face value gets one.

In this case, Ticketmaster used dynamic pricing and the price of the tickets rose during the online queueing process. This is a kind of software that is widely used in markets where the supply is fixed, such as hotel rooms and seats on trains or flights. The software adjusts the price either upwards or downwards in response to the demand so that supply and demand coincide as closely as possible. An important point is that using this software reduces the extent of secondary markets. If it was fully used, there would be almost no touts as their role would have been taken over by software.

What about the Government’s pandering to this outcry? Firstly, if they restrict dynamic pricing generally, they will make a whole series of markets work less well, with serious effects (like not being able to get a hotel room or a taxi). If it is only tickets for cultural and sporting events, then the obvious question is how and why these are different? If price flexibility is banned, artists and venues will lose a way of finding what the right price is – they will face the high risk of getting it wrong and either playing to an empty venue or having many disappointed and disgruntled fans. If the result is low prices, you will have even more cases of people spending entire days on line in an electronic queue to no result – in other words, a shortage. What you will never get is the fantasy of everybody getting the ticket they want at the price they would like.

Do politicians like Lisa Nandy want to have to explain to angry punters why they have not delivered the impossible? There is a fundamental reality: resources are scare relative to possible demand and in some cases, the supply is fixed (or as near as makes no difference). There is no escaping this in any possible world.

 

This article was first published on CapX.