Monday, April 20, 2009

Forwards and options in sports tickets

With IPL underway, one of the biggest problem for respective city fans would be over the procurement of tickets for the latter matches and final stages, given the natural uncertainty surrounding the prospects of their teams and the fact that tickets are sold out well in advance. It may not offer much attraction for a Kolkota Knightriders fan to go all the way to South Africa to watch a final between Chennai Super Kings and delhi Daredevils. In such circumstances, the fans are left with only two alternatives - buy the ticket in advance and risk not using it or buy it at exorbitant rates in the blackmarket (or from scalpers) after their teams entry is confirmed.

Given the success of options and forwards contracts in financial markets in hedging for similar uncertainties, one would have though that it would be natural for an options market to develop around ticket sales for major sporting events. Traders hedge for the uncertainty in the movement of share prices by taking short (sell at a strike price) and long (buy at a strike price) positions through options and forward contracts. IPL and other major sporting event organizers can take a leaf out of the financial markets and create a market in forwards and options contracts in tickets to both reduce scalping and make fans happier.

Felix Salmon and Alvin Roth draw attention to the work of Preethika Sainam, Sridhar Balasubramanian, and Barry Bayus who examined ticket pricing in sports markets where there is uncertainty about the teams that will play in a final event, and proposed an options market in ticket sales. They also claim that a model where fans can buy an option on a ticket well before the event and then decide on exercising the option, is not only beneficial to fans, but also more profitable for the organizers. In fact, the authors find that a ticket options model brings in greater profits for the organizers than both advance ticket sales and sales after the uncertainty is resolved.

Al Roth feels that the better alternative 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", thereby allowing 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". With options prices going up as the event deadline approaches, scalpers would find it profitable to trade the tickets procured by them in the options or forwards markets, thereby driving ticket sales in the black to the margins and eventually eliminate them.

There are important market design details (which are event and sport specific) to be worked out before this can be operationalized for sports events - number of ticket options to be sold, pricing of the options etc. The success of such models would depend on the thickness of the market, or the numbers of tickets that are available for trading. The model may therefore be more approapriate for very big events, where the attendance runs into a few tens of thousands.

Felix Salmon advocates taking it a step forward and suggests that hotel owners, instead of selling their rooms only once, can adopt the model by selling room reservation options that expire if their team does not make it to the finals. They stand to gain much more since, irrespective of anything, last minute demand for hotel rooms would persist during large events.

Whatever the final design of the market, I would not be surprised if some sporting event organizers soon adopt this model to market their tickets. And with financial markets imploding, laying off many financial sector professionals and drying up markets and profit opportunities, sporting event ticket options and forwards offers an excellent and much needed emerging opportunity for them and the economy!

Update 1
Miley Cyrus has decided to offer only e-tickets and deploy other innovative antiscalping technologies at each venue in her tour through 45 cities to control scalpers.

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