Long Lines and Cleared Markets
It is sometimes said that long lines at theaters, sports events, and amusement parks are signs of a market that is not clearing and that prices should be raised. In fact, people pay in a combination of money and time costs, that's all. With a moderate-income clientele it makes sense for some people to ration by waiting rather than by cash. These are the low opportunity cost customers.
At rock concerts, some performers insist on keeping ticket prices below what they can get for public relations purposes and, in the long run, it's probably a good strategy. They want all those teenaged fans to buy their CDs. And by definition, most teenagers have a low opportunity cost of time.
With theaters, there's only ever a long line for the more popular movies; you can usually swithch lines and walk right in to other movies. Peak-load pricing of movies would create uncertainty in the eyes of the consumer, who might then shy away from that particular theater. There are plenty of substitute forms of entertainment, after all, including pay-per-view tv, video rentals, etc. Stable pricing can be viewed as an investment in a larger and steadier clinetele base.
Home Depot made news a few years ago by not raising the price of building materials after a hurricane in Florida even though demand was through the roof. Its rationale was that since it had some tough competitors, it wanted to let its customers know that it wanted them to continue coming back long after the emergency of the hurricane. It worked. It sacrificed short-term profits for even higher long-term profits by looking at it as an investment. It's more short-sighted competitors lost out. The market worked marvelously, in other words.
It is always more useful to think of profit-maximizing rationales for pricing practices that persist for long periods of time instead of falling into the "market failure" trap. Businesses that price in such a way year in and year out, and are profitable because of it, are not likely to be doing it because they are stupid.
Comments (5)
I'd like to thank Prof. DiLorenzo and everyone else on the Mises blog/group who answered my question (I brought up this question in Mises Yahoo! Group).
It's actually interesting that you mentioned that business' that are more far-sighted will engratiate themselves with customers, since this is one of Philip Fisher's 15 points in Common Stocks and Uncommon Profits:
"One company will constantly make the sharpest possible deals with suppliers. Another will at times pay above contract price to a vendor who has had unexpected expense in making delivery, because it wants to be sure of having a dependable source of needed raw materials or high-quality components available when the market has turned and supplies may be desperately needed. The difference in treatment of customers is equally noticeable. The company that will go to special trouble and expense to take care of the needs of a regular customer caught in an unexpected jam may show lower profits on the particular transaction, but far greater profits over the years...The investor wanting maximum results should favor companies with a truly long-range outlook concerning profits."
Published: February 9, 2004 10:22 AM
“Underpricing� is one of the ways Wal-Mart makes a ton of money: their customer base is (usually) the bottom three quintiles of the income distribution, many of whom can “afford� to wait in long lines or spend a lot of time looking for the stuff they want. Since there is still a sizeable differential between Wal-Mart’s prices and their costs of production, this amounts to huge profits. In short, they identified the relevant margin on which a lot of people are willing to shop--“ability to wait� as opposed to “ability to pay�—and made a fortune doing so.
An interesting note on amusement parks: many parks (I know Six Flags does this) allow you to cut out the long lines and make “appointments� for certain rides for a small fee (usually $10-$15).
Published: February 9, 2004 10:59 AM
One such market in which pricing rigidity imposes tremendous costs is in professional sports.
Tickets to watch an NHL hockey game cost the same regardless of which team is visiting. Consequently, the games are sold out when the Toronto Maple Leafs or Detroit Red Wings are in town, but if its the Nashville Predators or the Columbus Blue Jackets, scalpers can hardly give away seats.
Granted, in some markets, the home team is a big enough draw in their own right (eg. Toronto has sold out every home game since 1945.)
I'd be interested to see if an auction style market could raise revenues while still satisfying fans. Giving the seats to the highest bidder would allow the club to exercise perfect price discrimination, while eliminating the possibility of empty seats. Even lower income fans would be satisfied, because they could get cheaper tickets for the low profile games in an auction than they could have if prices were fixed.
Published: February 9, 2004 12:51 PM
As far as professional sports go, it looks like the Chiacgo Cubs will be breaking new ground in terms of their pricing.
They will actually be charging different prices for different games. They now have "Value Dates", "Regular Dates" and "Prime Dates" with different pricing for each group.
http://chicago.cubs.mlb.com/NASApp/mlb/chc/ticketing/pricing_schedule.jsp
Published: February 9, 2004 1:47 PM
On pro sports:
Pro teams price discriminate almost perfectly already through a bewildering maze of promotions. For example, one can get $85 StL Blues tickets for $30 on Student Nights, Group Ticket Nights, season ticket discounts, etc.
Published: February 10, 2004 9:17 AM