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Lessons from a scalper: deregulated markets punish greed.

Article Excerpt
Greed took a beating during the recent presidential election. Last September 16th, John McCain blamed the financial meltdown on the "greed and mismanagement of Wall Street and Washington." Later that day, Barack Obama took a swing at greed in a speech that blamed the country's economic problems on the "Bush-McCain" philosophy of deregulation. According to Obama, rising foreclosures and falling incomes are "what happens when you confuse the free market with a free license to let special interests take whatever they can get, however they can get it."

The candidates' comments triggered an explosion of news reports that mentioned greed and deregulation in the same breath. In the month prior to the candidates' comments, the two words appeared together only three times in the same paragraph of a major American newspaper; in the month after, they appeared together 117 times. The candidates' comments and the coverage they spawned likely convinced many Americans that free markets cannot handle greed. Greed is just too powerful and, as a result, needs to be harnessed with the reins of government regulation.

But free markets are often much better at handling greed in socially desirable ways than government regulations. To demonstrate this, I examined the secondary market for Ohio State University football tickets.

Most of the fans sitting in Ohio Stadium--known affectionately as "The Horseshoe" or simply "The Shoe"--during Buckeyes games bought their tickets directly from the university's athletic department in the primary market. But some fans bought their tickets in the secondary market, often at Internet sites such as Stubhub. The secondary market involves the reselling of tickets, either by season ticket holders who discover that they can't attend games or by professional brokers who gobble up tickets to sell later at a profit.

The behavior of secondary markets for tickets to sporting events (as well as concerts and plays) is especially pertinent because many states have recently deregulated those markets. Six years ago, there were 22 states that stringently regulated "ticket scalping" either by putting caps on allowable markups of ticket prices or by outlawing secondary sales altogether for particular events. All but a handful of those states have repealed or reformed those laws, including Florida, Illinois, Louisiana, Minnesota, New York, and South Carolina. Massachusetts is currently debating whether to repeal its anti-scalping law.

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THE BIG GAME

For this study, I collected data on secondary market prices, quantities, and locations of football tickets for the October 25, 2008 game between Ohio State and Penn State. This was one of the biggest games of the 2008 college football season, matching two Associated Press Top- 10 football teams that were contending for the Big 10 Conference championship and a berth in the Rose Bowl or, possibly, the national championship game. Ultimately, 105,711 fans attended the game, setting an Ohio Stadium record.

The secondary market data came from Stubhub, an Internet website (owned by eBay) where users can buy and sell tickets to sporting events, plays, and concerts. Stubhub acts as a middleman, making money by charging commissions of 10 percent to sellers and 15 percent to buyers. Sellers may set any price they choose, making it an ideal source of information on "greedy" sellers.

I collected information at two points in time. The first...

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