Are football tickets under-priced?

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. 

Comments

[Billious]

What have you been smokin' man?

[Dave Timoney]

I doubt that many owners keep ticket prices down so they can sell more meat pies or programmes. If they were interested in offsetting revenue streams, they would subsidise ticket prices with TV income rather than matchday sales. That is the expectation of most fans, and that is why they are currently miffed by price increases coinciding with a new TV contract.

What ensures that stadia are full is not under-pricing but comprehensive membership schemes and category pricing. Together with the increase in season tickets as a proportion of the total crowd (a consequence of all-seater stadia), and the disappearance of pay-on-the-day, this makes it easier for clubs to predict and thus ensure full crowds. This isn't foolproof, but the volatility in gates is far less today than in the past.

The membership schemes also mean that tourists (i.e. casuals with selfie-sticks rather than international supporters clubs) will never be more than marginal to crowd composition. TV gives the impression there are far more in the ground as they often end up in the rubbish seats at the front, particularly near the halfway line where th cameras pick them up.

You also need to bear in mind that ticket prices vary depending on the category of game. For example, at Arsenal A games are 2.5 times the price of C games (these categories are based on anticipated demand before the season starts, so Leicester next Sunday is still a C). What this means is that the owners are actually jacking up the price considerably for the most popular games.

[Ben]

A system where we supply the goods to those who are willing to part with the most stored labour (cash) seems fair when looking at the transaction between the buyer (fan) and seller (club).

However it utterly breaks down if we accept that obtaining said cash is arbitrary, with more going to those connected to corrupt private banks (financiers) than to wealth creators (labourers).

How long can they keep this going for? How long will people pay part of their own labour to keep the police from stringing up the financiers?

That's the thing about elastic. It snaps.

[Luis Enrique]

I remember seeing a great economics paper about how it can take time to reach the model-predicted outcome. Example was I think fire service and unions hiring lawyers in disputes. If one side has lawyer and other does not, probability of winning is higher, if both do probability unchanged, both worse off having to bear cost of lawyers. Data showed initial position of no lawyers then over the years use of lawyers becoming more frequent until all disputes involved lawyers on both sides. or something like that. This reminds me of that because model might say clubs will extract full consumer surplus, but that doesn't mean they will jump straight there. Also think there is maybe a ratchet effect - clubs get richer, players' wages rise, ambitious clubs need more money to attract best players, and repeat.

heterodox critics don't like economic models which start by assuming perfect information etc. and then add frictions or what not. Like you say here, what at first appears a departure from rationality can be a cue to help us understand what's going on. I think same can be said of mainstream economic method starting with a unrealistic benchmark and adding ingredients to move closer to reality. To my mind quite a useful way of structuring your thinking

(not saying I don't see the risk of some people thinking that perfect markets or whatever is actually an attainable thing and imperfections are actually undesirable - that's a misunderstanding of what those words - perfect and imperfection - mean, but maybe some peoples' think does get warped by these words)

[Almar]

The fact that one sort of competition is called "perfect" and all other sorts "imperfect", rather than e.g. "X-Competition" etc. does carry a message to those who have either never learned through the technical definition of "perfect" or who(like many economists) do not keep it in the forefront of their minds.

[bdbd]

Perhaps just as we speak of "efficiency wages" that are higher than what market clearing considerations alone suggest they should be, we could speak of "efficiency prices" that are lower than the levels suggested by market clearing considerations alone.

[Dinero]

The phrase "price inelastic" is slightly awkward because if something is not flexible and adaptable to a change in price then it is in fact sensitive to it but in academic economics it is used to describe the opposite case. Its use stems from describing a straight line on a graph rather than the characteristic of the attribute I guess.

[Metatone]

I think Luis Enrique hits the first important point - the process isn't instantaneous.

The second is that pricing vs attendance of events isn't particularly linear. Clubs are only edging up prices in part because there is a region where attendance goes pretty quickly from "sold-out with people wanting more" to "actually, people start to look hard at substitutes."

[Deviation From The Mean]

The whole historical basis of a football club is that it is tied to the locality. Some clubs of course have become global.

However, a club will not want to totally sever its links with the local community.

The point is that fans have more power than they use. This should have been the focus of the article actually, not why are prices lower but why is power not asserted. But what do you expect from a city boy tosser?

I suspect that manufacturers of beans do not face this issues as those who run football clubs (possibly at the national level).

[Matt Friedrichs]

A bit was written about this after the New York Yankees opened their new baseball stadium and prime seats behind home plate, with very expensive prices, were often empty.

[Claire Jones]

But the protest worked because the fans showed solidarity and left the ground a quarter empty. What you assert - that fans are willing to support their club at any price - was challenged by 10,000 supporters leaving en masse. The protest was not just a challenge to the club, but to other would-be matchgoers. The message: Go the match and pay £77 and you're a scab.

[daguix]

There is a fifth point. Maybe the most important. In football, referees are somewhat "influenced" by the public. It biases unconciously their decisions and favors the odd for the receiving team (60/40). So there is a trade-off between ticket price maximisation and referee "influence".