As of today, ticket scalping becomes legal in the state of Minnesota for the first time since 1913 (according to this Star Tribune article). While local governments can still ban or regulate the practice, the state of Minnesota will not.
The demand for an event is based upon many of the usual factors (the income of buyers, prices of substitute goods, etc). The quality of the event also matters. In many cases, such as with sports and some concerts, the quality of event is unknown at the time that prices are set. Therefore, ticketing agencies set prices with an eye towards the expected demand for an event.
For example, consider the simplest of economic models to explain the setting of prices and the risks faced by scalpers. Suppose a risk-neutral event holder has 10,000 tickets for sale, all tickets will be priced the same, and there is an equal chance that the demand for the event will be either high or low. If the holder knew the demand would be high, he could set tickets for $50. If the demand were known to be low, then he'd charge $30. But from the event holder's point of view, the expected demand is midway between the high and low demands, so he sets a face value of $40.
What will scalpers do? Ticket scalping represents a secondary market in which holders of tickets resell their tickets to presumably the highest bidders. Since scalpers are, basically, speculators on tickets, if they feel the expected benefits from scalping outweighs the expected costs, then they will snatch up tickets. If not, then they won't buy tickets.
Because scalpers are speculators, they provide a service similar to that provided by other speculators: they help ensure that tickets will be available to those who are willing and able to buy them at whatever the market price "should" be - that is, they help equilibrate actual demand with the supply of tickets. Since consumers of tickets don't know the quality of an event before it happens, they take a risk that the event may suck. Scalpers, by ensuring that there are adequate tickets available, help consumers mitigate risk. If a scalper earns a premium on each ticket he sells, a portion of the premium can be thought of as compensation for taking that risk. All else equal, the higher the premium, the more tickets scalpers will offer.
Of course the real world is much more complicated than this. Ticket prices differ between sections, the demand for events is often constantly changing, scalpers face arrest in some cases, and some event holders price discriminate in various ways. I will touch on some of these below, but this simple model captures the gist of the problem.
Some argue that allowing scalping would drive the price (i.e. face value) of tickets higher because there would be more scalpers buying more tickets. That may be true, but an offsetting effect occurs when there are more scalpers competing with one another. That should drive secondary market ticket prices down.
Moreover, one of the costs of doing illegal business is the expected fine you'll pay (expected fine = probability of getting caught * fine). At least some of this cost should be built into the price of scalped tickets. Make the scalping, and competition between scalpers ensures that this premium goes away.
You could argue that scalpers also help event holders mitigate the risks they take. They set their ticket prices based on expected demand. Some of those tickets go to scalpers who then resell the tickets in the secondary market. As described above, the scalpers take a risk that the demand will be lower than expected, a risk that would otherwise be borne by the event holders.
But event holders have historically frowned on scalping. There are nuisance factors associated with scalping (aggressive scalpers and the congregation of scalpers near the entrance to facilities are bothersome to some fans). Event holders also lose some control over who comes to their events. Indeed, my understanding is that England has instituted scalping laws to help teams combat hooliganism. But while the scalpers get the returns, the event holders bear many costs without adequate compensation. So it is understandable that they have resisted the relaxing of scalping laws.
Another concern of event holders are counterfeit tickets. Some fear that allowing scalping opens the door to more counterfeiting. But making scalping legal should limit the ability of counterfeiters to do their dirty work. Allowing legal scalping will insure that there are more legal tickets on the streets, lowering the
secondary market prices, thereby making counterfeiting less attractive. In
addition, scalpers will have an incentive to fight counterfeiting as
well. So it's not clear that increased counterfeiting is something that we should be all that concerned about
On the other hand, the secondary market also represents competition to some event holders. The ticket prices for some events increase as the event gets closer, as was the case with the recent Brew Fest here in Mankato. But the presence of scalpers limits the ability for event holders to charge higher prices in the future.
So what will be the overall effect on ticket prices? It's hard to say because given the supply of tickets available, it is the demand for the event per-se that is important in determining prices, not the presence of scalpers. My sense is that, overall, the overall ticket prices that fans end up paying may decrease. In fact, Depken (2007) writes:
This paper investigates the impact of anti-scalping laws on the face value of tickets in professional football and baseball. Previous theoretical models have suggested that scalpers might cause an increase in prices at the ticket window because they represent an increase in demand. This paper provides a model in which ticket scalping has an ambiguous impact on ticket window prices, making the actual impact an empirical question. Empirical analysis suggest that in cities with anti-scalping laws average per-game season ticket prices are approximately $2 greater in baseball and $10 greater in football. Anti-scalping laws actually increase team revenues, as the laws have no adverse effect on attendance. Thus, event promoters might have sufficient pecuniary incentive to tacitly or explicitly support anti-scalping legislation.
Here is an earlier version of Depken's paper.