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Thursday, February 02, 2006

Do Futures Markets Have a Sporting Chance?

Fledgling futures market for tickets to sporting events:

Wait Till Next Year, but Lock In the Ticket Price Now, by Alan B. Krueger, Economic Scene, NY Times:  Joe Kocott and Ian McKinley are both die-hard Pittsburgh Steelers fans. In the past week, Mr. McKinley urgently searched eBay, Craigslist, StubHub and other sources for a ticket to Super Bowl XL, eventually buying one for $2,500, while Mr. Kocott secured tickets for himself, his wife and seven children, and nine others in early January by paying an average of $350 for 18 futures contracts that promised him tickets if the Steelers made it to the championship game. ...  Stephen K. Happel and Marianne M. Jennings of Arizona State University proposed a futures market for tickets to major events to reduce risk in 2002. Their idea is finally coming to fruition. ...

If fans are risk-averse, then ticket futures add economic value. To see this, suppose that there is a 10 percent chance of a fan's team reaching the Super Bowl and that a futures contract costs $250 while a ticket could be purchased the week of the game for $2,500. At these terms, a risk-loving fan intent on going to the Super Bowl if his team plays would wait to buy a ticket for $2,500, and a risk-averse fan would buy a futures contract for $250.

Indeed, a risk-averse fan would be willing to pay more than $250 for a futures contract in this situation. Like an insurance policy, ticket futures sell at a premium over their expected value because they help risk-averse buyers hedge against uncertainty.

To gauge the size of the premium, note that a fan could guarantee a ticket to the Super Bowl by buying a futures contract for every team in a conference; one is bound to make it. Call this expenditure the sure-thing price of a ticket. If fans were risk-neutral, the sure-thing price would equal the price that tickets are expected to cost at game time — say $2,500 this year. The excess of the sure-thing price over $2,500 gives a rough indication of the market valuation of insuring against risk. The futures appear to have been priced reasonably. The premium for a sure-thing ticket from Yoonew ranged from about 35 percent to 60 percent during the season, not far from the markup in some lines of insurance. ...

The emerging market for futures tickets remains thin, however, ... To survive, the futures market will require an influx of customers. ... Establishing a reputation for dependability is a prerequisite for a futures market in tickets to succeed. The sports leagues could help by distributing some tickets to fans through the futures market.

Update: William Polley also comments.

    Posted by on Thursday, February 2, 2006 at 12:15 AM in Economics | Permalink  TrackBack (0)  Comments (0)


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