Tuesday, April 14, 2009

Forward contracts on sporting events

How should tickets for big sporting events be sold, in advance of information about which teams will play in them? American baseball's World Series, the NCAA's basketball Final Four, and other such events are elimination tournaments. So it is known well in advance that there will be some important games, but which teams will play (and hence which fans will most want to attend) is known only quite near the event.

This makes the market less thick than it might be far in advance, and requires fast market clearing once the relevant information becomes known. In turn, this opens the market to third party brokers, and scalping.

Contingent contracts might be a solution (e.g. a market in which I can buy a ticket to the World Series contingent on the Boston Red Sox being in the game).

Felix Salmon blogs about a paper exploring a related idea (because of a fear that contingent contracts might be regarded as repugnant): Selling forwards for sporting events.

"Preethika Sainam of Indiana University, along with two colleagues from Chapel Hill, has an interesting paper suggesting that sports organizations shouldn’t sell tickets to big sporting events, like the finals of the Final Four, where the teams who will be playing are unknown. Instead, they say, they should sell options to buy tickets at a certain price once it’s known who’s going to be playing. This system, they say, will raise more money in ticket sales, will make fans happier, and will reduce scalping.
The interesting thing is that reading between the lines of the paper, it seems that selling options is actually the second-best solution to these problems. The best solution would be to replace some (but not all) of the tickets with team-specific forwards, which expire worthless if that team doesn’t make the finals. That would allow the “team-oriented” fans to buy forwards rather than tickets which they might not want if their team fails to make it to the finals; it would allow “game-oriented” fans to buy tickets to the finals just like they can right now; it would mean that many more tickets could be sold in total (for the final match-up, you can sell 32 times as many forwards as there are seats), which would reduce the supply/demand imbalance which often drives scalping.
Professor Sainam, however, reckons that the forwards idea is a non-starter, for reasons of optics: she worries, she tells me, “that fans could perceive the league as profiting unduly from the situation”. And so the options option is the next best thing. "

HT: Steve Leider (on his way to Michigan).


Alex said...

You might want to check out: https://www.yoonew.com/exchange/. I'd be interested to hear your analysis of it. They create a market for sporting event ticket derivatives.

michael webster said...

How is selling an option going to reduce scalping, ie reduce speculation? The options will be transferable and scalpers will buy them up.

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