Tuesday, June 26, 2007

Not a free market

There are a wide range of problems with economic theory, not the least of which is Truman's wish for a "one-handed economist", but the one I would like to address here is this - simple economic theories, like the sort us non-economists may have picked up in passing, are difficult to apply to real world situations, because they involve many simplifications. Actually, complex economic theories are also difficult to apply to real world situations, both because they are complex and because there are so many, most managing to be mutually contradictory.

Yesterday, I blogged about yet another petty incursion of the managerialism of the British political class; the Fawcett society being part of that class, though thankfully not yet part of the ruling or governing ones. (Chris, of Stumbling and Mumbling, did this better and in far more detail here.) That seemed to cause a minor degree of uproar, mostly here and here - with people suggesting that sex distinction should be abolished from sport, as opposed to abolishing pay discrimination due to sex.

So let's pick on another aspect where professional tennis fails to meet basic (ie simplistic) economic principles - the law of supply and demand. This is a reasonably realistic rule which says that, for a given demand for a specific good, you (the supplier) can get a better price if the good is scarce than if it is common and for a given supply of a good, you can get a better price if, and I know this seems so simple, demand is high rather than low. To paraphrase, if people want something badly and there isn't much of it to go round, it is dearer than if people don't want it and there is lots of it. In all good basic economics answers, you have your supply curve and your demand curve and they intersect at the magic free (and efficient) market price. This is clearly, in many cases utter tosh - as it requires free and efficient markets. As an aside, I don't think that supply / demand graphs can be strictly considered have standard deviation but consider by how many σ from the norm Ms Hilton must be :) We can all think of non-free markets (and a non-free market is, IMHO, by definition non-efficient) - the EU's Common Agriculture Policy being a particularly mendacious example, and we also have the supposedly-prudish-but-possibly-more-sinister US ban on internet gambling). Non-efficient markets are also common - export restrictions, whether through government action or lack of transport to market; monopoly middlemen (where some see Walmart and Tesco looming); and supply restrictions (the planning process for house-building in the UK.)

So, is the market for Wimbledon, and for its tickets, a free and efficient one?

No. Firstly, the market for tennis tournaments is, like most sport, neither free nor efficient - the International Tennis Federation, the Association of Tennis Professionals and the Women's Tennis Association, together with their partners, the television companies, advertisers and sponsors, all have a (legitimate) interest in making this a controlled market. The supply, of tennis talent, of TV time, of advertisers, is limited - and a cartel has been established to share out the financial benefits. This is clearly not "fair" but then nothing much is - whether this is to the public good, as opposed to a free market, I have no idea.

Is the (simpler) market for tickets free and efficient? No, again. Taking Wimbledon, any market where the initial sale value of the item from the producer - especially where the cost of distribution is a mere stamp - is £87 and the end-customer price is between £2000 and £3000, is clearly failing. Without wishing to downplay the work of the All England Club's "official hospitality agent"s - the official prices are £2850 (men's) and £1800 (ladies), ex VAT but inc booze & strawberries - there is clearly a market failure here. I assume (because the price difference between Sportsworld and Keith Prowse is a fiver or less) that these prices are set and they will clearly form a ceiling to the after-market prices, until the official sources sell out and then you get an extreme form of the supply scarcity effect kicking in. Also, please note, that (as I mentioned below) the market in the tickets is controlled and purchasers from touts (and possibly even from some of the established ticket resellers) may find themselves excluded from the event.

The real world is always more complex than real economic theory allows. Real economic theory is more complex than any explanation of it allows. Combine these two and you are sure to get strange results when you assume that reality will follow simple economic explanations. But note the hindsight and soundbite effects - when something does happen, it is easy for the media to find an economist to explain exactly why. If, however, they had been able to predict it in advance ...

I am sure some of you economists out there will wish to pick holes or to blatantly disagree. Feel free.


No comments:

HTTP Error 403: You are not authorised to access the file "\real_name_and_address.html" on this server.

(c) 'Surreptitious Evil' 2006 - 2017.