Saturday’s protest by Liverpool fans at the proposed rise in ticket prices poses a puzzle - that from the point of view of elementary economic theory, football tickets are too cheap.
What I mean is simple. Fans are addicts; many would pay much more to see their team. Demand is therefore price-inelastic. And despite playing indifferent football, Anfield – like most Premier League stadia – has been full this season. Both these facts suggest that Liverpool’s owners could increase profits by charging fans more. Econ 101, therefore, tells us that tickets are under-priced.
This is not just true for Liverpool. A survey (pdf) by Anthony Krautmann and David Berri has found that most fans in many popular sports pay less for their tickets than conventional economic theory would predict.
Which poses the question: are team owners therefore irrational?
Not necessarily. There are (at least?) four justifications for such apparent under-pricing.
First, say Krautmann and Berri, owners can recoup the revenues they lose from under-pricing tickets by making more in other ways: selling programmes, merchandise and over-priced food and drink in the stadium.
Secondly, Shane Sanders points out that it can be rational to under-price tickets to ensure that stadia are full. A full ground and vibrant atmosphere, he says, increase a team’s chance of winning and thus increases future revenues. One way in which this happens is that referees are biased towards home teams with big crowds: we all know there is such a thing as a “Stretford End penalty” (aka a fair tackle).
Thirdly, higher ticket prices can have adverse compositional effects: they might price out younger and poorer fans but replace them with tourists – the sort who buy those half-and-half scarves and should, therefore be shot on sight. This increases uncertainty about longer-term revenues: a potentially life-long loyal young supporter is lost and a more fickle one is gained. It also diminishes home advantage: refs are more likely to give dodgy decisions in front of thousands of screaming Scousers than in front quiet Japanese tourists.
Fourthly, high ticket prices can make life harder for owners. They raise fans’ expectations: if you’re spending £50 to see a game you’ll expect better football than if you spend just £10: I suspect that a big reason why Arsene Wenger has been criticised so much in recent years is not so much that Arsenal’s performances have been poor but because high prices have raised expectations.
This imposes several costs on owners. Impatient demands to sack managers force them into difficult decisions. Fans’ protests can be bad for the owners’ “brand”. And even the thickest-skinned owner doesn’t like having tens of thousands of people shouting abuse at him: even Mike Ashley has felt compelled to spend money at Newcastle United this season.
In these ways, apparently irrational behaviour – the under-pricing of tickets – might not, in fact, be so irrational after all.
Sometimes, what looks like irrational behaviour turns out to make sense if we consider agents’ motives and incentives more carefully.
The point, I suspect, broadens. To take just one example, the great performance of momentum and defensive stocks makes it appear that fund managers’ have, stupidly, left money on the table. However, when we consider that such stocks expose them to benchmark risk – the danger of under-performing their peers and so getting sacked – their behaviour becomes more understandable.
Apparent departures from rational behaviour should not lead us to immediately decry stupidity. They should instead be cues to investigate further why people are behaving as they are. This, of course, is true for life as well as economics.