It's a goal! No, we're not talking about the consolation goal that Brazil let in at the end of a 7-1 thrashing of Hong Kong, but the own-goal scored by the HKFA in its ticketing strategy. We look at the economics of event pricing and suggest a better, market-driven approach to ticket sales, which should reduce the amount of public subsidies in HK sports and arts. These subsidies are in direct conflict with HK's free-market philosophy.

Hong Kong's Own Goal
13 February 2005

One of the areas we like to write about on Webb-site.com is Hong Kong's attempts to operate a free market economy. Today this takes us off the beaten track and into the microcosm of Hong Kong soccer, in the wake of Brazil's 7-1 thrashing of Hong Kong in front of a half-empty (or, if you prefer, half full) stadium on Wednesday 9-Feb-05. It wasn't just the team that got thrashed, but ticket revenue too.

After experiencing a sell-out crowd and a frothy secondary market for a match with Real Madrid in Aug-03, the Hong Kong Football Association (HKFA), with all the market savvy of an Eskimo in Ecuador, came up with the following scheme to sell 25,000 tickets for the 2005 Carlsberg Cup:

  1. Anyone could register for a random draw, by internet or telephone, without payment. You just entered your HK identity number, date of birth and phone number, between 08:00 on Wed-26-Jan-05 and 23:00 on Thu-27-Jan-05.
  2. 6,250 people were picked at random, with another 1,000 added to the wait list, and the winners were announced on the web and via hotline at 23:00 on Fri-28-Jan-05.
  3. Each winner would have the right to buy up to 4 tickets, but only if they appeared at the HK Stadium in a timeslot specified by the organisers on Sun-30-Jan-05.
  4. Tickets were priced at HK$1500 (US$192), $1200, $800 and $500 (elderly and student concessionary tickets were $150) based on this seating plan. As you can see, the number of $500 tickets was relatively small.

Anyone with the faintest understanding of markets will realise that the most obvious problem with this arrangement is that registration gives you a right without an obligation - a free option to buy tickets, without any money up front. Frankly we are surprised that only 59,763 people tried to register, but then the scheme was only announced the day before the 2-day window started. After taking out duplicates and those with missing data, it reduced to 53,209 registered persons. Since registration carried no obligation, nobody needed to make a judgement about whether the pricing was reasonable at that time - you simply registered to get the option. As a result, a large number of the registrants were probably speculators and their nominees.

Another problem was that winners had to get to the Stadium on a Sunday, in a narrow time-slot, in order to actually buy the tickets. Not e-commerce, but f-commerce, "f" as in foot, if you are being polite about it. Bear in mind that the arrangements were only announced on the Wednesday before, so this may have been a deterrent to some people, particularly those living in the New Territories. Also, those who were allocated later time-slots for purchase may have been deterred from showing up by the possibility that the best seats in their zone had already been sold.

The third problem, implied by the relatively low number of registrants (compared to, say, the IPOs of Tom.com, the MTRC or the Link REIT IPOs), was pricing. As it turned out, most of the speculators did not exercise their right to buy, and by the end of the Sunday sales to the randomly-picked buyers, organisers had "very few" $500 tickets left, but plenty of the others. Later on the Monday, the HKFA announced that 18,000 tickets remained, implying that only 7,000 had been sold. By the end of the match, final ticket sales were 19,825, and attendance was 23,425 out of a capacity of about 40,000. However, 15,000 seats were available through other channels, presumably including sponsors and the football association, so part of the actual sales were probably made this way.

Finally, if pricing had been perceived as low (which it wasn't), then there would have been even more registrations, and the people who actually wanted to attend the match would have received only a small portion of the tickets, while speculators would have exercised their option to buy and then resold the tickets in the secondary market.

The economic problem

And that brings us to the economic problem associated with fixed-price sporting events: how do you fill as many seats as possible, whilst maximising revenue and minimising risk? How do you know in advance how popular an event will be, and how much spectators will be willing to pay for it? And how do you know in advance how much more someone will pay for a better view of the action, that is, the pricing differential between seat types?

You can't. As you can see from the Brazil-HK match, pricing was really a stab in the dark. As an organiser, if you want to be certain of filling the seats, then you aim low, setting ticket prices at such a level that you are confident of a minimum level of revenue, but increasing the likelihood that there will be excess demand and that tickets will trade at a large premium in the secondary market, to the benefit of speculators, and resulting in a disproportionate number of men with tattoos jumping long queues of applicants. This indeed is what investment bankers like to do when selling IPOs (under-pricing that is, not wearing tattoos). If you persuade the issuer to set a lower price, then there can be more confidence that the offer will go like the clappers (to use a technical term) and you can use the under-pricing to reward your favourite brokerage clients with allocations.

On the other hand, as an organiser, if you want to target higher revenue but with more risk, you can set ticket prices higher, and run the risk of being undersubscribed, having a half-empty stadium and failing to maximise your revenue or even to cover your costs. In the case of an IPO, that can mean a cancelled offering and a company which walks away with costs but no financing.

Airlines and hotels experience similar pricing challenges, and to some extent they resolve this by dynamic pricing - book early, and you get one price, book later, and you may pay more (if seats are in short supply) or less (if they are trying to fill seats with standby or bucket-shop tickets). But events organisers find it difficult to discount, because they risk alienating the public who paid higher prices earlier. And unlike airlines or hotels, events like soccer fixtures or pop concerts tend to be one-offs: they do not normally have another match or show the next day, so they cannot shift demand to match supply, and they do not have a track record of near-identical flights (same day of the week, same destination, same time of year) to judge their pricing.

Let the market decide

The answer is to let the market decide the right price for the tickets, by tender or open auction. There are numerous different ways to do this, and the internet certainly can help. Without going into all the details, there are two main types of auction - either a uniform-price auction, where the price for each seating zone is set at the highest price at or above which the bids cover all the seats, or an English auction, in which bids are accepted in descending order, and what you bid is what you pay. In the second case, you end up with people paying different prices for the same seats., but you don't necessarily get higher proceeds, because people bid lower on average to avoid "winner's curse" - the knowledge that you paid much more than the lowest successful bidder.

In 1996, half of the Nobel prize in economics went to William Vickrey, partly because of his work in the 1960s in auction theory, and the single-item version of the uniform-price auction is often named after him. He died of a heart attack 3 days after the announcement. In a single-item Vickrey auction, each person submits a sealed bid and the person with the highest bid wins, but pays the price of the second-highest bid, thereby encouraging each person to bid what they truly believe something is worth, rather than just bidding slightly above what they think everyone else will bid for the item.

In an auction for multiple items, there may be a tie for the lowest winning bid, in which case, to tidy things up, you can either allocate tickets to those bids by random draw or on a time-priority (first-bid-first-served) basis. Everyone who bid above the lowest winning price gets a full allocation.

For those rare IPOs which are sold by auction, the most popular method is the uniform-price auction, with a fixed closing date by which final bids are made. Google's IPO was an example of this. In another sense, the same method is used in most IPOs these days, through a "book-building process" in which institutions indicate to the "book-runner" how much stock they would be willing to buy at what price, and a "book" of demand is built which allows the book-runner to determine a strike price. That price is what the public then pays in the retail portion of the offer.

So, if we were running the next sale of soccer tickets in HK (a sport in which we normally have not the slightest interest), then here is what we would do:

  1. Decide how many zones of seats will be auctioned (A, B, C, D) based on quality of view (e.g. front, back, lower, upper).
  2. Decide what the goals are (pardon the pun) - do you want to achieve at least a minimum level of revenue, or enough to cover costs, or do you want to achieve the highest possible attendance, to fill the crowd? Based on this, set a minimum bid price for each zone, but set it low to get the bidding going (see note below).
  3. Decide a starting date and a closing date for the auction, allowing a reasonable time for people to make and increase their bids (say, 2 weeks for a major event). Leave enough time after the closing date for people to make their plans and receive their tickets.
  4. Announce the sales method and timetable early, and explain it clearly.
  5. Allow applications, backed by cash, cheque (which will be cleared) or credit card, for as many tickets as the applicant wants in each zone, at whatever price they are willing to pay, subject to the minimum. Bids can be made by web, phone or box office. All bids (including those received by phone or box office) would be entered into an online auction system. The online system would disclose bidding progress, ideally in real time (see note below), and the same data would be available by computerised telephone hotline.
  6. Applications cannot be withdrawn, but may be increased in size or price at any time up to the closing date, subject to making top-up payment for the increase.
  7. Through this system, the market will determine the lowest price at which bids cover all the available seats in that zone (the "Uniform Price", see note below). Once bids cover all available seats, the Uniform Price will start to rise above the minimum bid. As bidding progresses, notify bidders by e-mail or SMS if their bids are too low to succeed, and invite them to increase.
  8. Contiguous seating could be guaranteed in blocks of up to say, 6, and beyond that size, the applicant may be allocated seats which are not adjacent, for example, a successful bid for 15 seats would get at least two blocks of 6, if not all 15 together.
  9. Close the auction, allocate seats to the winning bidders at the final Uniform Price, and mail them their tickets and any refunds of unused bid money. For large applications (like in IPOs) you could allow people a day to collect their tickets and cheques before mailing the remainder.
  10. If there are any unsold tickets, offer them for sale at not less than the Uniform Price for each zone. Note that the organiser can create an incentive to participate in the auction by warning that post-auction prices will be set higher than the Uniform Price - say, at least 10% higher.

Notes: it is still possible that there will be applications for fewer seats than there are seats available (like an undersubscribed IPO), or that the seats can only just covered by a very low Uniform Price, resulting in insufficient revenue. Accordingly, the organiser can reserve the right to reject low bids even if it results in unsold seats. The Uniform Price could then be set higher up the bid curve, so that it maximises revenue (seats sold x Uniform Price) or so that it fulfils some other objective, such as covering costs, or such as ensuring that the Uniform Price for that zone exceeds the Uniform price for an "inferior" zone, or so that the auction covers a minimum percentage of the seats available. There are many other variations beyond the scope of this article, but you get the general idea.

Although the Uniform Price auction was designed for a sealed-bid system, since it is practically impossible to prevent information leakage during an auction on this scale, it is better to go with a transparent approach, with progress disclosed in real-time or near-real-time, than to have insider trading.

Concessions

Although it is market-distorting, if it is deemed socially desirable (perhaps to stimulate interest in soccer) to sell discounted concessionary tickets for students, the elderly, or other special groups, these can be awarded by the same auction method as above, but subject to proving eligibility in advance. As you can see on the map, the HKFA put blocks of seats that would otherwise have been priced at $800 and $1200 into the $150 concession pricing. But  there is no reason why the concessionary ticket holders should all have to sit together - you could simply set a cap on the number of concessionary seats in each type of seating, and then conduct a uniform-price tender on those seats. This would be interesting, because it may turn out that the elderly, or students, can in fact afford to pay more for the tickets than current pricing indicates. But let the market decide the fair price by holding a separate auction for their group. You could include a rule that the Uniform Price for concessionary tickets will not be set above the standard ones for that zone.

These tickets would have to be personalised to prevent resale in the full-price market, or at the least, clearly marked so that eligibility (for example, as a student or senior citizen) is verified at the gate, so student tickets could only be traded amongst students, and so on.

Trading

Amazingly, for a free market, HK events organisers have in the past taken steps to personalise full-price (non-concessionary) tickets, or adopted other measures (such as conditions of sale) to prevent or inhibit them being resold in the secondary market. This is silly, because if the ticket is non-transferable, then it reduces freedom, and so the buyer will pay less for it in the first place. There are numerous reasons why a ticket holder might not eventually want to attend an event, including unexpected work or travel, sickness, being offered a better seat, discovering a better way to spend the time, or simply wanting to speculate on the value of the tickets. By selling freely transferable tickets, the organiser will capture the value of transferability.

There are plenty of on-line ways to trade events tickets, and this should be encouraged, not frowned upon. The secondary market provides liquidity for tickets purchased in the primary market. Of course, so long as the organiser is offering unsold tickets in the "primary" market, the secondary market will not trade above the primary price, but if all tickets have been sold, then there is no natural ceiling.

Bogus tickets are always a risk in the secondary market, but this risk can be almost eliminated if a trusted intermediary verifies the tickets (by physically holding them) before sale. Alternatively, in a peer-to-peer market such as eBay or Go2HK, the price will reflect that risk.

There is an opportunity here for the event organiser, which can use the secondary market to offer unsold or resold tickets which are guaranteed to be genuine. The organiser can validate tickets for resale and make a commission in the process. Another approach, adopted by StubHub in the US, is to take credit card details from sellers, and if their ticket turns out to be fake or non-existent, then the seller is charged for the cost of buying another one, if one can be found.

Subsidies, sports and arts

Let us not forget that the Football Association, and many other sporting bodies, are subsidised by Government, and that means you, the public. Even if you agree with this policy (which we don't), you will probably accept that it is irresponsible for subsidised organisations to leave money on the table by failing to maximise net income from their commercial activities, thereby increasing the amount of financial support they need from Government.

Despite the sell-out in the Real Madrid game, for which tickets were resold in the secondary market at much higher prices, the HKFA recorded a small loss of HK$822,666 which had to be paid for by the Government, because it had promised to cover losses up to $10m. A market-driven auction-based approach to ticket pricing would have avoided that expense and probably made a substantial surplus for the HKFA whilst still having a sell-out crowd.

It needn't stop there. The arts in Hong Kong are also heavily subsidised. Or at least, certain areas are, including orchestras, dance, Cantonese opera, theatre and the annual Arts Festival. Subsidising the arts (or anything else) distorts the free market, reduces the incentive for private sector arts and entertainment, and also reduces the incentive for subsidised entities to maximise their commercial revenues. Meanwhile if you are organising a pop concert, running a cinema or an art gallery in Hollywood Road, you get no subsidy at all, and are on your own.

This year, of the total budget of $60m for the Arts Festival, $16.4m will come from the Government, and $3.6m from the Jockey Club Charities Trust, funded by a government-sanctioned monopoly on gambling. Not only that, but the festival is also supported by the Government-funded Tourism Board, and only $27m, or less than half the budget, is expected to come from ticket sales. And yet every year, ticket categories in many of the Arts Festival events are sold out weeks or months ahead of the event, implying that revenue for these events would have been higher (and subsidies lower) if ticket prices were set by a more market-driven mechanism.

As a further indication of the lack of market savvy in the Arts Festival, here we are in 2005, and local household internet penetration surpassed 64% in mid-2004, yet for many of the events (except those at the Academy for Performing Arts), you cannot even book on the web, only by telephone manned by expensive humans at Urbtix (yes, this ticketing office is run by the Government), and only for 10 hours per day.

© Webb-site.com, 2005


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