The Enigma of Ticket Exchanges (and Other Reselling Markets) and the Design of Commission Fees

The literature establishes (and practice confirms) that sellers can benefit from allowing consumers to purchase in advance of the date of actual consumption (e.g., concert tickets, sporting events, etc.). Because of this advance purchasing, consumers can find themselves either with a ticket that they no longer want, or without a ticket that they wish to have. In the past, scalpers would facilitate transactions among these consumers, for a fee. Sellers historically disliked those practices and actively worked to prevent them. In fact, we obtain a stark finding: an unfettered and efficient reselling market eliminates all of the benefits of advance selling, which justifies sellers' historic hostility to reselling. But now ticket exchanges are common, growing, and even embraced by sellers. What changed? We present a theory that demonstrates reselling is actually beneficial for sellers under one crucial condition-the seller must have some control over the reselling process, thereby allowing the seller to earn something from each transaction through commission fees. The old-fashioned paper ticket did not give such control, but technology now enables electronic tickets, which do. In fact, a seller cannot earn more than what it receives from a properly designed reselling market (i.e., reselling is optimal for the seller), especially for popular events with limited capacity. When market demand is uncertain, the optimal commission should vary with the demand state, which may be challenging to implement in practice. Fortunately, seller revenue is strong even with a single commission rate, and captures nearly all of the achievable revenue if combined with a cap on collected commissions. However, while authorized reselling increase overall social welfare because it corrects the allocation errors inherent in advance selling, consumer surplus is always greater with an uncontrolled reselling market. In sum, our results explain why the seller's view towards reselling has shifted dramatically, we illuminate the welfare tradeoffs this shift entails, and provide simple and effective commission structures.