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Long Lines and Cleared Markets


Tags Prices

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.

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