A few years ago, Northwestern University economist Sandeep Baliga took to a blog to offer two of Chicago's most successful entrepreneurs, chef Grant Achatz and his business partner Nick Kokonas, a lesson in pricing.
Kokonas and Achatz already had made news by selling advance tickets to dine at their newest restaurant, Next. But Baliga advised Kokonas to be bolder and sell those tickets only by auction, thereby maximizing revenue. (If someone's willing to pay $1,000 a ticket, shouldn't Kokonas and Achatz reap that profit, rather than a reseller on Craigslist?)
Kokonas replied to the post with four reasons that he wouldn't be taking the economist's advice. Among them was that Kokonas never wanted Next patrons to feel they were paying "a premium," even for a premium product. The experience, Kokonas said in an interview, needs to feel as if it's worth more than $500 if you're charging $500.
So Baliga and his business partner, fellow Northwestern professor and blogger Jeffrey Ely, went searching for someone else "to try out their crazy ideas on" — and their employer, Northwestern University, accepted their offer. The result was Purple Pricing, an auction method used to sell some seats for this past season's football games against Ohio State and Michigan.
As Ely and Baliga predicted, the university was able to increase its revenue from those two games — by hundreds of thousands of dollars, said Mike Polisky, a deputy director of athletics at Northwestern. But the mechanics of Purple Pricing represent just a fraction of Ely and Baliga's vision for how the ticket market should and, they contend, one day will operate.
"It will be more like the airlines," Baliga said. "You can't resell your ticket to whomever you want. But maybe the airline could buy it back off you, or the airline itself has a secondary market you can sell on," its own version of StubHub.
Here's how Ely describes the current conundrum. Sometimes people are buying tickets at price P, then reselling those tickets at four times P.
"The money is going into someone's pocket, but the people who control the sale of these tickets, it's not going to them," Ely said. "So that's a huge puzzle for economists — because I'm the monopoly provider of that ticket, and I'm not earning my monopoly profits."
Purple Pricing theoretically solves this problem. The school sets the price for purple-priced games based on many factors, including what the tickets are advertised for on the secondary market. So the price starts high and is allowed to fall until the game sells out or Northwestern officials close the auction to stop the decline.
So suppose you want an Ohio State versus Northwestern football ticket, and the box office quotes a price of $110. If that sounds fair, you buy. If it seems too high, you could put in a bid for what you're willing to pay, say $80. When Northwestern closes the auction or the game sells out, if the price is $75, the person who bought a ticket at $110 gets a $35 refund and the person who bid $80, only pays $75. If the price falls only to $85, the $80 bidder loses out on tickets.
But more often than not, teams face the opposite problem: Low-demand games in which the secondary market is offering tickets for less than face value.
Purple Pricing, as it's designed now, doesn't really solve this problem because Northwestern officials never will allow auction prices to fall below the price of season tickets. If they did that, they'd risk losing the good will of their most loyal fans.
Ely argues that the only way to move beyond these problems is to make tickets nontransferable. But for complex economic reasons, ticket sellers don't want to annihilate the secondary market. Instead, they want to control it.
"Maybe I have a contract with StubHub or I have my own exchange, but whatever it is, to resell your ticket, you do it through me," the original seller, Ely said. "And maybe I want to put a wedge there. Buy low and sell high, and make some of the cut on the secondary market sale. Maybe I want to make sure you can't sell your tickets at a price lower than what I'm selling. ... I now control every variable of the secondary market. I am the secondary market."
Why hasn't this been done before? Because the technology required, a smartphone, wasn't widely available until recently.
For it to work, "I have to be able to specify that only this person can enter the stadium with this ticket — and that person is not necessarily the original purchaser of the ticket," Ely said. "You can't do this with paper tickets unless I'm checking IDs at the door, and no one is going to go through the hassle of checking IDs. ... But I can specify that the only phone that can download that ticket is yours. Now you can (get around this by giving) someone your phone, but you're not going to risk your phone to sell a ticket. That's a little bit crude, but that's one way."
Another way is using a mobile check-in system similar to Foursquare.
"When you arrive at the stadium, you have to use your phone to check in, and then I (electronically) deliver your ticket to you," Ely said.
Existing contracts with ticket technology suppliers and expected anger and confusion among technology-averse ticket holders are among the problems standing in the way of Ely and Baliga's vision.
"There is no reason in economics for this not to happen," Ely said. "You see little movements in this direction happening all of the time, and there's going to be some time when the floodgates open."