For good or ill, Tragically Hip scalpers an example of the market's solution to shortages: Don Pittis

The howls of outrage over Tragically Hip ticket "profiteers" may have a lot to do with the tragic circumstances of the popular band's final concerts.

Lead singer Gord Downie's brain cancer makes the markup in ticket prices feel like a moral issue. But like it or not, the secondary market for Hip tickets is a textbook example of how humans set the price of goods that are in short supply.

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While some may wish it wasn't so, the market pricing of goods from tickets to houses to gasoline is an essential part of practically everything we do. And the flaws in the system that make this case seem unfair or inefficient are by no means limited to the business of selling tickets.

Despite its inadequacies, the process of using speculators to set market prices is a useful tool inside and outside the entertainment business.

"We had our first ever ticket go on StubHub for our last tour," Tyler Bancroft from the band Said the Whale told a CBC Vancouver panel discussion this week. 

The band's $25 ticket sold for $75 on the ticket reselling site. Bancroft says the band's reaction was complex. 

"There was a moment of 'We made it, we have a ticket on StubHub," he said with a chuckle. "I will admit that a small part of me was a little upset because I was thinking we'd undervalued ourselves."

Bought low, sold high

And this is one of the main criticisms of secondary markets. Instead of the profits from the final sale going to the people who made the product, the cash goes to an intermediary who created nothing. They just bought the product low and sold it high.

Bancroft's concern also reflects one of the reasons why secondary markets are so valuable. While the producer may have some idea of how much it cost to produce the product, they may not know what people are willing to pay for it.

The speculator buys the product at the current selling price, and sells it for what the market will bear. And to be fair, the selling price does not always make a profit for the middleman.

In market lore there is the famous case of Nelson Bunker Hunt, who with his brother decided to corner the global silver market, effectively trying to buy enough of the world supply to push the price up. In 1979, the Hunt brothers drove the price from $11 US an ounce to $50.

Their triumph was short-lived. Soon, silver plunged and the speculating brothers lost a large family fortune.

Short supply?

Speculating on something that is in short supply also depends on the product remaining in short supply. Even with something like silver, whose supply seems limited at least in the short term, exceptionally high prices can bring stored reserves to the market.

As we saw in the case of $100 oil, high prices sent investors around the world in search of new sources and soon supply increased and prices plunged. 

In the case of entertainment, clever marketing can manipulate the feeling of shortage. Cher fans came out in droves to buy tickets to her "The Farewell Tour" in 2002.

But when demand began to soar for the limited number of performances, Cher's promoters simply increased the number of concerts. And ten years later, Cher was still performing, including her Dressed to Kill Tour in 2014. Some fans may have overpaid.

The same thing could apply to those Tragically Hip tickets. With more concerts added and talk of a televised performance, there is always a possibility that people who bought tickets at the highest prices shelled out too much.

Opaque process

There are lots of ways to keep prices low and fair. There are even systems devised to make sure that in any bidding process, a share of the markup goes to the concert producers. The process of ticket reselling is opaque enough it is hard to be certain when that happens.

At the most basic level, some concerts can be offered with free admission, such as the Hip's performance at London's Trafalgar Square in 2013, assuring that fans without thick wallets can also see the show by lining up or arriving early. That's the same distribution system as existed in the former Soviet Union, where goods such as bread and toilet paper were in short supply. Under a first-come, first-served system, the last-comers lose out.

Rationing systems can also assure widespread distribution. With ticket sales, the equivalent might be to limit the number of sales per address or licence number.

Black market

Of course, rationing notoriously results in black markets where people decide that the value of the product — the experience of seeing the concert, for example — is simply not as high as the current price and pass the ticket on to someone who values it more.

There are also systems, as with some airline tickets, that tag a ticket to a photo ID so that the ticket is only good when used by the original buyer.

That assumes the sellers of products or the promoters of concerts want sales to be completely orderly and fair. From Vancouver condos to new cellphones to cauliflower, sometimes the perception that there's not enough to go around only increases the frenzy to get a piece of the action.

Follow Don on Twitter @don_pittis

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