The Economics [101] (and Beyond) of Commencement Tickets

Every year, as Winter becomes Spring and the prospect of graduation looms ever closer, many Columbia undergraduates' social media accounts are inundated with requests for (and offers of) extra Commencement tickets. With a maximum of four Commencement tickets per undergraduate student allowed, most Seniors find themselves in the predicament of having too many people to invite and—you guessed it—too few tickets with which to guarantee those guests entrance to the ceremony. Yet, because the number of tickets requested by each student is not tied to the number of people she plans on inviting or who let alone plan on attending the ceremony, there’s always a sizable amount of extra Commencement tickets floating around in the “secondary” market (and an even larger amount of people desperate to find them). This is where the controversy begins. Setting aside that “trading” Commencement tickets is nominally prohibited by the administration, many claim that actually monetizing this trade is unfair and unethical. I will try to explore some of the arguments and to break down the primary issues behind this debate.

Because this debate involves the exchange of a particular good, it is simple to investigate with one of the most basic economic models of them all: a simple supply and demand model. Operating under the assumption that nobody is necessarily against the mere act of exchanging these tickets, the debate is then over the price: should trading these tickets be free, or should “suppliers” be allowed to charge a price for them? The argument of those against this practice can be summarized by the setting of a price ceiling of $0 on this Commencement ticket market (meaning, if you’re supplying tickets in this secondary market, it must be done so for free). After all, Seniors are not themselves charged to obtain their tickets, so the “cost” to the “supplier” is literally $0; why should she sell them at what is essentially an infinite markup over her zero marginal cost?

An essential feature of this market is that we can assume demand is quite inelastic (students are willing to pay a high price to have that relative or friend be at graduation), and supply is perfectly inelastic. Whether we consider a market for both “primary” and “secondary” Commencement tickets combined or we just look at the “extra” tickets floating around campus, the supply of total tickets is fixed by the administration, and the supply of extra tickets can also be assumed to be fixed. After all, it’s a decently safe assumption to make that no one will un-invite Grandma because they’re being offered a high price for Grandma’s ticket. Thus, we can assume the supply of extra tickets is fixed, since the number of people for each student that can and will come to graduation is very unlikely to depend on the price that student can get from giving that ticket away.

Thus, looking only at the market for extra Commencement tickets, it is simple to see that because of the inelasticity of supply, a $0 price ceiling in this market represents simply a redistribution of surplus, not addition of surplus or a deadweight loss. The argument is thus about the breakdown of that surplus, the question becoming: Should the entire surplus of this market be Consumer Surplus (marked in green above)? Or should “producers” of these tickets also obtain some surplus for the “service” they’re providing (making Consumer Surplus the orange portion, and Producer Surplus the yellow square below it)? To some, the answer to this question boils down to how we view the “service” these suppliers are providing. After all, their cost to providing this service is, once again, $0. Moreover, it seems morally wrong to profit off of the emotional: should suppliers make money just because they know having relatives at Commencement is particularly important and meaningful to those demanding these tickets? Let’s explore further, since this simple supply-and-demand framework gives us more intuition.

We can see from this framework that “consumer” surplus approaches infinity the more inelastic the demand. Thus, having Grandma there at Commencement is, like the famed MasterCard ad campaign, “priceless”. In turn, will people really care about paying the 20, 30, 40 dollars of the “free” market if the marginal utility of getting that ticket far surpasses the cost? Will they mind giving up a small fraction of that incredibly large utility to those who made that extra ticket possible? To opponents of people selling tickets, the answer to the previous questions is no: after all, for some, having Grandma there is indeed a “priceless” moment, but “priceless” is literally impossible. The danger of this kind of market is that it threatens to “price out” those consumers who just can’t pay the extra price. It becomes then an inequality problem: should those who are willing and able to pay an “unlimited” price (or are able and willing to increase the price of the ticket in an “unofficial” auction) get the ticket above those who have just as much (sometimes even more) need for the ticket, but can’t pay for it?

This is where some on the opposite side of the argument (those who believe that yes, people should be allowed to sell these tickets) come in and say: We can’t assume that sellers are all wealthy, greedy capitalists; some may very well need the money. In that case, don’t they deserve a bit of the created value from the transaction? Don’t sellers deserve some of that surplus from their “service” of introducing the tickets to the market (that normally, if they didn’t request, wouldn’t be introduced anyway?) In some views, yes.

We can think of sellers as opening the market even more and actually increasing the total supply of tickets available. Thus, in that case, suppliers are providing a very valuable service to the market, and as such should be compensated for the value they are providing.

If we view Supply_original as the supply of tickets requested if everyone actually invited the number that they knew was coming up to the maximum of 4, then Supply_actual is larger thanks to the people who request four tickets (knowing they only actually need less than that) and either sell or give them away in the “secondary market”. In that sense, these “sellers” may be benefitting the market as a whole (as can be seen by the addition of the extra surplus, marked in green). Especially if we assume that potential sellers need some incentive to provide these tickets (i.e. assume those with extra tickets care absolutely nothing about those in need of extra tickets, so if they’re forced to give them out for free, they just won’t go through the trouble of getting extra tickets, communicating with someone and making those available to that “buyer"), then allowing a price above $0 is enough incentive to get those tickets out into the market and provide that extra surplus. More importantly, this assumption would of course make our supply curve quite different, since in assuming that suppliers need an incentive to supply extra tickets, now we’d be no longer facing a perfectly inelastic supply curve. With a supply curve that is no longer completely vertical, it is not difficult to see that the more elastic the supply curve (especially close to price=$0), the more gravely does a $0 price ceiling reduce the quantity supplied in the market and the greater the deadweight loss; allowing the “free” market to function may then create much more value in the scenario where the market faces an elastic supply curve (in short, where suppliers are unmoved by altruism and will only supply tickets for monetary compensation). But of course, this is still a difficult assumption to make; essentially, we’d be assuming that doing good for others is not enough incentive to be nice.

The answer thus boils down to what we believe is fair compensation for the service and the surplus these suppliers are creating. To opponents of selling tickets, the answer is: charity, generosity, and the good feeling from being nice should be enough. In fact, to these opponents, selling tickets is unethical and a rigging of the system in favor of the privileged. To supporters, suppliers themselves may deserve (and at times, need) money for their service. The validity of these arguments in turn depends on where you stand when it comes to:

• the fact that the marginal cost of supplying extra tickets is $0

• whether or not incentives are actually required to supply a product whose total cost is $0 (in short, are people nice, or are they opportunistic?)

• the ability of suppliers to earn money (if they need it) through means other than selling these tickets

•  What is fair compensation given the reality that many deserving graduates are unable to pay a price for a ticket that the supplier essentially got for free? 

While these are primarily philosophical questions, some solutions come to mind immediately.

Firstly, the administration could improve the ticket request system with incentives for honesty (people don’t request more than they really need with looks to sell), allowing those who need extra tickets to request extra ones (from the extra tickets other people didn’t request) in a second stage of the distribution process. Thus, make ticket distribution a multi-step process where admins can gauge need and distribute accordingly, handing those extra tickets out for free. This of course comes at the cost of increased complexity, and thought must be given to the kind of incentives necessary to incentivize honesty when requesting tickets.

Secondly, and this is less of a solution and more an acceptance of the complexity of the problem, perhaps we should consider ticket exchange transactions on a case-by-case basis: some people requested more tickets than they need. Is it bad for them to sell them at more than $0? The prevalent view is that no; this prices people out of the market, only benefits the privileged few who can pay for it, etc. But we have to consider the side of the sellers who may need that money. The prevalent view indeed makes a prototypical image of the “seller” as a greedy capitalist with billions in a bank account looking to profit out of emotions. Yet, we have to accept that for some people, the tickets may be a legitimate and necessary way to make money.

So in short, selling the tickets isn’t inherently wrong; it’s the free market and there’s clearly a demand for them for which, for many people, the marginal benefit of getting a ticket (I get to see Grandma at Commencement) is more than the monetary cost of getting Grandma a seat. The real unfairness comes when, let’s say, we have one person announcing a ticket, and two people reply: one honestly can’t pay and asks if the “seller” would be generous to give it away for free, while the other suggests she’s willing to pay a $20 price for it. The ticket goes to the $20 buyer. Does one of these buyers ultimately “deserve" it more than the other? This is a question a simple model like this really can’t answer very well. A utilitarian view perhaps considering the total social benefit might ask: Who gains the most utility from getting this ticket, and thus contributes the most to our collective Commencement surplus? If one is looking to invite a sibling, but the other a third-cousin five times removed from Latvia, many might agree that perhaps the one inviting the sibling should get it. In that sense though, since we can’t presume to know everybody’s story or reasons for buying or selling a ticket, it’s really too difficult to impose market-wide restrictions in the form of a price ceiling (after all, this “secondary” market is already, in essence, a black market) or to systematically monitor the fairness of transactions. In that situation, like in many other scenarios, education may actually be the best response, and the third possible solution (already, in fact, being exercised by many):

• Campaign so that nobody sells his or her tickets. If every single supplier gives them out for free, we all win: nobody gets priced out, and there’s no sense of unfairness or a rigging of the system by the most privileged. Now, in this “always free” scenario, what about the people who might need the money? Many might say they have other recourses to turn to: after all, there’s hundreds of ways to make money while only one way to get Commencement tickets. Surely then, a person looking to make money out of ticket sales (even if they really need the money) can have other options to make that money, whereas the person looking to invite Grandma to Commencement only has one. But, if this is still a concern, maybe sellers could be compelled to “tip” their seller for their services if the seller really needs the money (after establishing this on a case-by-case basis between buyer and sellers individually). Of course, the distinction between this and flat-out selling the ticket is very, very small (then, instead of the seller setting prices, the onus is on the “buyer” to suggest themselves as a “generous tipper”, which brings us back to our original problem).

Another consideration is the “war on drugs” example: if we assume that, removing all possible monetary incentives some suppliers will “exit” the market, if we limit the supply of “priced” tickets (in this case, by forcing them all to be handed out for free, or forcing everyone to request exactly the amount they need), then we could hurt some consumers: there’ll always be someone to profit from hiking the prices even further because making them free has now severely limited the number of tickets available. Whereas before Mary could get one for $20, now that everyone’s giving them out for free, everyone she turns to has already given his or hers away… except for Josh, who’s now in the position to ask a desperate Mary for $60 instead.

In that sense, then, this question is really a difficult one to answer, not least importantly because it has a very strong emotional undertone. We all want to see all our loved ones’ faces there on Commencement day to celebrate our triumphs. Should some benefit from their extra tickets and the needs of others to sell in a “secondary market”? Is the system rigged to help the wealthy more than those who may not afford the price of the ticket in that secondary market? Is it necessarily a "bad thing” that some are able to pay for the tickets while others are not? Do the wealthy, after all, deserve to get an extra ticket more or less than those without the resources to buy one? Most importantly, are there any new systems that we could think up to address this issue and ensure that everyone gets to see as many of their loved ones as possible come Commencement Day, without having to dish out extra money to someone who didn’t have to incur any costs in acquiring that “product” themselves? These questions are a great overview of the kinds of normative questions Economics oftentimes can’t find an absolute answer to. They’re also an interesting example of the kinds of economic and social issues us graduates will be facing (and for many of us, have had to face already) as we head out into the real world: What’s “fair”? Does our system unfairly benefit some over others? Should access to a product or service be determined by one’s ability to pay? Do some deserve access to a product more than other people? Does the “free (in this case, secondary) market” produce optimal outcomes for those who participate in it? And how can the government (in this case, the administration) step in to produce closer-to-optimal results? I wish I had the answers, but hopefully, this simple framework anyone could see in just the first month of Econ 101 has shed some light on both the superficial and the underlying issues behind the buying and selling of Commencement tickets.

I leave you with my final questions: can we put a price on everything? And even if we can, does that still mean we should always have the license to charge it?

An Introduction

Hello! My name is Ricardo R. Rodriguez-Padilla. At the present moment, I’m a Senior at Columbia University just a month away from graduating with a Bachelor of Arts in Financial Economics and Business Management. After graduation, I’m lucky to be staying in New York City to work as an Analyst at the economic and financial consulting firm, Cornerstone Research. I hope to use my experience there as an exploration of many of the topics that I’m most passionate about in Economics. In particular, I hope to gain some further insight into topics in Industrial Organization, and use my time there as research experience I can put to use for a PhD in Economics a couple of years down the line.

Like many other people, I view Economics as a tool and a framework with which to think about and address many of the issues of our day. While many of these may be more “traditionally” in the realm of what people think about when they hear “Economics” (i.e. finance, money, growth, etc.), I’m particularly passionate about applying economic models to explore and consider less “traditional” questions, specially on the individual-scale of Microeconomics and in Cultural Economics.

I’m sure many would agree that Economics does not have all the answers; it often relies on simplifying assumptions, and the validity of those assumptions is often questionable in many scenarios. But economic models help provide a framework with which to begin exploring and identifying both the big-picture and microscopic-level questions we must ask when thinking about a problem or a phenomenon. To that extent, Economics can certainly inform and enlighten our analysis of policies and of organizational, individual, and macro-level decisions. Economic thinking can aid us in formulating and testing hypotheses, discovering factors we hadn’t considered before in a problem, guide our understanding, and ultimately provide preliminary (and sometimes, final) answers to the questions we’re trying to answer.

While I have many questions I’d like to answer, perhaps my most motivating questions are the ones that guide both those who are passionate about Economics and actual Economists (a rank I’d like to join myself soon). The questions that guide most of what I (and many others) think about are: What can I do to contribute to our understanding of behavior and decision-making (and the incentives and factors that play into those decisions)? More generally, how can I help understand and draw connections between the causes and the effects of the phenomena and the decisions by individuals, organizations, and nations-at-large that we see in our world and society today? And most importantly, how can I use that knowledge to create new, optimal effects through better, more informed decision-making, and ultimately (as cliché as it may sound) make our world a better place?

I hope this blog will serve as a place where I can explore some of the economic questions I’m concerned with as I hopefully move closer to a PhD in Economics.