Selling forwards for sporting events

By Felix Salmon
April 3, 2009

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. She explains why even when you only sell as many options as there are seats, scalping should still be reduced:

The league can insist that the fam buying the option is the same as the one exercising it. So, until a point fairly close to the game, the fan retains the ticket. Beyond that, if the ticket is of little value to the fan once the uncertainty is resolved, the fan has two choices: (a) Let the option expire, and (b) Buy the ticket and take responsibility for scalping it (assuming that there is no “policing at the entry gate”). We note here that fans scalping tickets is a different issue from professional scalpers scalping tickets. Many fans would not want to undertake the risk of exercising the option and then not being able to scalp the ticket successfully. The league can also enhance the incentive to let the option expire (if the fan is not willing to see the game) by reimbusing a small fraction of the option price to the credit card of the fan in case the option was left to expire.

Expired options, of course, then become empty seats, which can be sold directly by the league rather than by scalpers.

Personally I’m a big fan of the forwards idea — especially for big international competitions like the World Cup or the European Cup. But if the likes of FIFA don’t want to go there, that shouldn’t stop local hotels from adopting the idea. Why sell all your rooms only once for the night of the big match? Instead, sell forwards, which expire worthless if a certain team doesn’t make the final. Hotels are struggling these days — this seems like an easy way to make a lot of money, if you’re lucky enough to be in a city hosting a major cup final.

6 comments

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Nice article. I wonder how sports organizations have dealt with other transactions which have values, in part, determined by the identity of teams in a particular event.

Consider, for example, the potential discrepancy between an NBA final between New York-Los Angeles and Charlotte-Oklahoma City. Does the league sell advertising at the same rate even though the potential benefit to the advertiser is likely to be vastly different? If the advertising is sold prior to knowing who is playing in the event, does the contract specify separate rates depending on the match-up? If they did this transparently, then it would be really bad optics indeed, as the league would stand to benefit from supporting specific teams over others.

I can see how leagues would be hesitant to adopt this idea. It makes perfect sense for peripheral markets though.

Posted by cna | Report as abusive

As a fan you can hedge the high price of a ticket in the (unlikely if you a Newcastle fan)bookies. If an FA cup ticket is going to cost 500 quid , you can put down say 25 quid @ 20-1 before round 4. On can construct more sophisticated strategies where on buy or sells to flatten the delta in the 0-100 index markets

Posted by Tim Bassett | Report as abusive

So, would the forward prices be adjusted periodically based on team results and athletes’ injuries? Would they trade in Chicago or on their own exchange? I got to say I love the idea.

And here I was thinking that you were against financial innovation, Felix.

Posted by Chris G | Report as abusive

It already exists! (At least in one form.)

See http://www.yoonew.com

It seems to work exact as you describe.

Also, Ticket Reserve, now rebranded as FirstDibz, has been doing something similar for a few years.

http://www.firstdibz.com/

You can buy (and can resell) a contract to acquire a ticket at face value to a playoff or championship game contingent on the selected team actually making it to that game.

Because the company is not affiliated with the sports leagues, it doesn’t lead to the perception problem Sainam worries about.

this site also has some similar feautres for another industry

http://www.goldalert.com

Posted by john major | Report as abusive