Monopoly Economics through the Case of Ticketmaster
Taylor Swift performs onstage on the opening night of the Eras tour at State Farm Stadium in Glendale, Arizona, on March 17, 2023. Kevin Mazur / Getty Images for TAS Rights Management
Gregory Loo, Logistics Secretary
In November 2022, American singer Taylor Swift announced her upcoming Eras tour with Ticketmaster, a leading ticketing platform, handling the sales of tickets. The excitement from her fans, however, soon morphed into anger and frustration. On the first day of sales, fans complained of website crashes and extraordinarily long waits. Furthermore, the planned sale for the general public was cancelled, leaving many fans who could not participate in the online sale empty handed (Bendlin, 2023). The resulting backlash eventually culminated in a hearing by the United States Senate in January 2023, with the intention of holding an inquiry about Ticketmaster and its parent company Live Nation (Bartz & Warburton, 2023), an events promoter and venue operator.
However, the Senate’s inquiry was not about concert tickets or the bad blood between fans and Ticketmaster. The Senate’s primary concern was the business practices of Live Nation Entertainment, formed by the merger of Ticketmaster and Live Nation in 2010 (Lorsch, 2023). The justification given for this merger was that it could streamline an “inefficient” ticketing process, thereby bringing a greater experience to concertgoers (The Hollywood Reporter, 2009). Additionally, by merging ticketing and administrative functions, both companies could save an estimated $40 million (Adegoke, 2009). In the backdrop of the Great Recession, this was an appealing way to cut costs at a time when concerts were likely not to be in great demand. Furthermore, the merger would allow for vertical integration of LiveNation’s operations in the concert industry. In the concert industry, the production process consists of several stages, such as venue booking and ticketing. By taking control of the ticketing stage of the production process, LiveNation would thus be able to reduce its costs in securing ticketing providers. Furthermore, incorporating ticketing services in its business would render it less vulnerable to hiccups in the ticketing process, such as potential legal disputes that could arise. By buying over Ticketmaster, it could leverage Ticketmaster's expertise in the ticketing industry seamlessly. This would allow them to cut long term costs and leverage economies of scale, where cost per individual concert organised by the company would decrease as the number of concerts produced and sold increased. Economies of scale is an economic phenomenon which long run average total costs fall as output increases. In other words, as a firm increases the quantity of its products, the average cost per unit of product falls. Take note that “long run” in this case does not refer to a time period, rather it refers to a situation in which the firm finds itself able to vary its factors of productions, such as labour (manpower) and capital (such as machinery). The idea of leveraging this phenomenon of economies of scale has often been used to justify mergers (Besanko & Braeutigam, 2020). However, their merger is not well-received. They have been accused of acting as a monopoly and dominating the market for concert tickets, effectively leaving the market with no significant competition.
Penny Harrison and her son Parker Harrison rally outside the U.S. Capitol during the Senate Judiciary Committee's Ticketmaster hearing on Tuesday morning. Drew Angerer/Getty Images
Unpacking a Monopoly
What is a monopoly? Just like the iconic game by Parker Brothers, a monopoly occurs when a player gains the most power. In economics, a monopoly is a market structure where there is only a single producer in a market. In reality, however, a pure monopoly is rare. Even though a pure monopoly is rare, in some markets, there exist such high barriers to entry that only one firm is able to enter and produce that particular good. These are mainly resource-intensive goods such as electricity. This is known as a natural monopoly. Legally, “monopoly” is more broadly defined – it refers to a firm that enjoys significant market power (Orbach & Campbell Rebling, 2012). With strong market power, the monopolist effectively has price setting ability and has a considerable or complete control of prices. The monopolist has the liberty to use these powers to increase their profits. Aside from charging high prices for their goods, monopolies have also been criticised for stifling competition in an economy. In free market economies, competition is widely encouraged as it incentivises firms to innovate, improve the quality of its products or increase productivity so as not to lose its consumers to competing firms. This is particularly so for firms operating in a market characterised by oligopoly, in order to have products with distinctive features in order to broaden its appeal to consumers. An oligopoly is a market structure in which there are a few firms producing similar products (eg Apple, Samsung, Oppo, Huawei, Vivo in the smartphone market, or Samsung, LG, Toshiba, Hitachi, Sharp in the electronics market). Conversely, without any competition, the firm’s dominant position is unthreatened; it will have no incentive to improve its products, services or production processes. Therefore, lacking any alternatives, consumers will lose out as they could be charged high prices for shoddy products. In the case of Ticketmaster and Live Nation, ticket prices have reportedly tripled since the merger (Timmons, 2022) and its services have certainly not been satisfactory, as fans might attest to. Musicians have also complained that they have little negotiating power with Live Nation due to their control over ticketing and venues, and are virtually bound to them if they wish to hold concerts (Lorsch, 2023). This could lead to an exploitative relationship where Live Nation effectively maximises its own profits at the expense of the musician’s wishes. As early as 1994, Ticketmaster has been accused of cutting musicians out of venue bookings because of fee disputes (Philips, 1994). This effectively means musicians are unable to hold concerts at all. Now that the merger has significantly increased its market power, Ticketmaster could be emboldened to engage in more of such undesirable practices.
The Monopoly Logo. Parker Brothers/Hasbro
Regulating Monopolies
The above show the negative impacts of a monopoly, such as consumers being subject to high prices, low quality services and retaliatory behaviour. However, establishing a monopoly is not illegal. Making it illegal could be seen as curbing entrepreneurial activity and business as a ban would effectively mean a legal cap on the size of your business (Lorsch, 2023). In other words, no matter how much effort the firm puts in, its growth can be halted at some point. This would reduce the incentive of firms to continue developing their business and increase productivity (which is why monopolies are bad), thereby defeating the purpose of implementing such a ban. As mentioned earlier, the merger of Ticketmaster and Live Nation supposedly had the aim of improving efficiency in the concert market and cutting costs. In 2010, some officials even argued that the merger would see a reduction in prices of concert tickets (Timmons, 2022), which would benefit consumers. While this did not materialise, the idea of increased efficiency, where goods are allocated in such a way that maximises the benefits to consumers and producers while minimising costs, was a logical and desirable business goal. Thus, attempts by governments to curb such behaviours would be difficult to execute due to opposition and backlash. For example, businesses that donate to campaigns of politicians may rescind such support if the politician pushes for any legislation to regulate monopolies and thereby curb their potential growth, or profits. Without such financial support, politicians may find it difficult to run their campaigns, which reduces voter outreach. As a result, they may lose votes and by extension, possibly their elections, ending their political careers. Wary of this, politicians and governments may ultimately decide not to push through with such legislation.
What can we do to prevent a monopolist from exploiting its market power? Governments often have ways to regulate competition. For example, the United States Federal Trade Commission (FTC) was created to prevent unfair methods of competition “through law enforcement, advocacy, research and education” (Federal Trade Commission, n.d.). The FTC reviews any proposed merger and acquisition by deciding if it harms consumers, reduces competition, or engages in unfair business practices (Federal Trade Commission, n.d.). Nevertheless, some firms do successfully merge and subsequently engage in unethical behaviour using their reinforced market power. In fact, Ticketmaster has been accused of jacking up prices for tickets (Seglins, Houlihan, Ouellet, & Wolfe-Wylie, 2018) and was fined for illegally accessing another firm’s computer systems (Moghe, 2020). Similarly in Singapore, we have the Competition & Consumer Commission of Singapore (CCCS) to administer the Competition Act. The Competition Act prohibits producers from entering into a cartel, abusing their market power and entering a merger that significantly reduces competition (Tan & Ng, 2016). A cartel describes a group of producers in a particular market who collude together to set prices and production quantities in order to maximise profits, effectively operating together as a monopolist. In 2018, Grab and Uber were fined a total of 13 million SGD for their merger as the CCCS found that the merger substantially reduced competition. The financial penalties came alongside several other policies to increase competition in the ride hailing market. These include maintaining Grab’s pre-merger pricing algorithm, insulating riders’ from excessive price surges, while also maintaining driver commission rates. (Competition & Consumer Commission Singapore, 2018). This ensures that consumers will not have to pay unreasonably high prices for rides, while ensuring that the quality of rides will not be diminished since drivers will continue to have the same incentives as before. Nevertheless, Grab’s surge pricing structure results in higher fares when there are large numbers of ride hailers during peak periods. The higher fares encourage drivers to continue plying the roads and offering their services. However, Grab has acknowledged that there are downsides to its pricing algorithms and have made efforts to regulate prices (Grab, 2018). While it is admirable that Grab has acknowledged such issues and have promised to refine its algorithm, are these efforts to regulate prices effective? Is more competition needed?
CCCS Logo. Competition & Consumer Commission Singapore
The Good of a Monopoly
Nevertheless, establishing a monopoly with high barriers of entry can enable more innovation. Firms can innovate and engage in research and development efforts freely without fear of any intellectual property infringement. In a competitive market, with no barriers of entry, any firm can enter the market and produce similar goods at any time. In the case of intellectual property, this lack of a barrier disincentives research and the development of new innovations. Such risk has manifested itself in the burgeoning tech sector where for example, Apple has infringed on the patents of smaller firms, such as Optis Wireless Technology (Michel, 2022). Thus, it seems logical for firms to form barriers of entry that culminate in monopolistic markets. However, strong legal frameworks can also exist to protect IP in a way that disincentivises monopolistic tendencies. For example, Apple was made to pay $300 million in damages to Optis for infringing on its standard essential patents. With sufficient legal consequences, IP theft can be prevented even if firms operate in a more competitive market (Nellis, 2021). Hence, strong legal frameworks can protect smaller firms from IP theft , reducing the need to engage in monopolistic behaviours.
Conclusion
In essence, despite its supposed benefits to firms, monopolies can lead to undesirable consequences for consumers. The Taylor Swift fiasco is one such example. Through regulatory interventions such as requiring government review and approval for proposed mergers and binding merged entities to legal decrees and punishing them for any violations, governments try to ensure that sufficient healthy competition remains in the economy and prevents firms from exploiting their dominant market positions to charge high prices for consumers. However, the success of such efforts are difficult to determine.
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