Wednesday, September 8, 2010

Lines and Prices and Bandwagons, Oh My!

Here is a quote from Gary Becker in a note he wrote in 1991:
Why doesn't the popular restaurant raise prices, which reduces the queue for seats but expands profits? Several decades ago I asked my class at Columbia to write a report on why successful Broadway plays do not raise prices much; instead they ration scarce seats, especially through delays in seeing a play. I did not get any satisfactory answers, and along with many others, I have continued to be puzzled by such pricing behavior. The same phenomenon is found in the pricing of successful sporting events, like the World Series and Superbowls, and in a related way in the pricing of best-selling books.
Becker goes on to describe how bandwagon effects can explain why popular restaurants charge a low price in spite of long lines. If everyone's demand increases on account of a large number of other individuals consuming the same good (no one likes to go to a baseball game that no one will attend), then raising the price has two costs: (1) it drives customers away (the usual cost), (2) it reduces the demand of everyone else on account of driving customers away, which drives even more customers away (driving more away).

The result is an unstable situation where restaurants (or producers of bandwagon goods) fear raising prices because the long term effect on sales is disastrous. Thus, restaurants that are popular cultivate this popularity by pricing so that there is always a line. For the same reason, college rivalry game tickets (or playoff tickets in the FCS) are more expensive than regular games, but not nearly enough to ration demand. Other methods, such as priority availability of tickets, are needed to make quantity supplied equal quantity demanded.

In extreme cases, suppliers prefer having a low price with a line to having a high price with no line. That's because the high price with no line feels like an empty restaurant. Hence, they'll expend resources to cultivate lines.

As an example, Sprinkles cupcakes (which I mentioned on Saturday) has a sign on the door to keep the door closed and form the line outside of the shop (presumably to keep the cupcakes fresh). This sign has a side benefit for a business like Sprinkles: It makes the line seem longer (and therefore, the cupcake experience seems more like the "it thing" and people are more willing to line up). It is a strange paradox that arises from bandwagon effects.

This logic also explains why baseball teams give out goodies to the first 10,000 people to show up to the ballpark. If it is Elvis night (Friday, Aug 13), it is comforting to know that at least 10,000 other people will have Elvis glasses with sideburns (because they were handed out at the gate). That's fun. It might even be so much fun that it makes it worth going to the game tonight. That's what the team is hoping, anyway.

No comments:

Post a Comment

Please feel free to share your ideas about this post in the open forum. Be mindful that comments in this blog are moderated. Please keep your comments respectful and on point.