Oasis fans, bourses, you gotta roll with it

After hundreds of complaints about how ‘dynamic pricing’ of tickets for the reunion tour next year of rock band Oasis has driven up ticket prices, the British government has promised to look into the pricing system. But dynamic pricing – which alters prices based on demand – increases efficiency of markets and has come to be used in all manner of things, from airline fares to concert tickets. Oasis isn’t the best judge of how much a ticket to their concert ought to cost. Their manager makes a guess and finds that a chunk of the tickets ends up with touts, who then match supply to demand for a profit. Concert organisers like Ticketmaster have been using dynamic pricing to ensure all tickets are sold at the best-possible price. Much to the dismay of fans paying eye-popping amounts, the process is fairer for bands like Oasis. And it eliminates touts.

Sebi has a valid related concern over the ‘flipping’ of IPO shares. Individual and institutional investors are displaying a strong speculative streak by selling a big chunk of allotted shares within a week of listing. Investor behaviour aside, divergence between primary and secondary market prices leads to this phenomenon. Greater the divergence, larger the post-listing turnover. How does Sebi solve this? It could discourage speculative behaviour by imposing constraints on IPO stock allocations. It could also work on aligning the price discovery mechanism in the primary market with the secondary market. The second solution is more elegant, but it runs into a problem. The price discovered in the primary market is static, while the latter works on the dynamic pricing principle. Scope for speculation can’t be eliminated.

IPOs have a more sophisticated method of price determination than rock concerts, and should ideally be able to minimise listing-week flipping. A book runner makes a more informed guess based on, among other things, investor appetite and corporate performance. But it’s still a guess. And when guesses are consistently wrong, the regulator needs to look at the estimation process.