Recent I blogged on Why are concert tickets under priced? This is just one example of a puzzle as to why prices so rarely rise in the face of a shortage. Tim Harford point out a number of other examples of this puzzle.
There was a shortage of Wii games consoles last Christmas, Xbox 360s in 2005, PlayStation 2 consoles before that, and so on, yet the retail price remained the same. To secure tickets for a hot concert, you will usually need to go to a ticket tout, because the regular concert promoters wouldn't dare charge a price that might bring demand down to the level of supply. And when US oil companies raised gasoline prices after Hurricane Katrina, there were howls of outrage – despite the fact that the refining infrastructure was badly damaged and it was self-evidently impossible to supply everyone at the customary lower price.But Harford is putting forward an explanation for the puzzle based on an idea by David Friedman. Harford writes,
The intuitive explanation, of course, is that we irrationally object to high prices even when the alternative is rationing, long queues, and uncertainty over whether we can buy what we really want.No one likes an explanation based on people being "irrational". This is where Friedman comes in. As Harford continues,
That is discomfiting for economists, but we might at least take solace in the idea that even though there is no immediate logic to a belief in the right price, there is at least an evolutionary logic. David Friedman – son of the late Milton Friedman, and a superb communicator of economics – has argued that our ancestors evolved in an environment where most transactions were one-on-one bargains. A hard-wired refusal to accept something other than the customary price would, in such a setting, be an advantage. Anyone who reacts to a price rise with irrational rage turns out to be a strong negotiator.But do we really have a "stubborn preference for a just price"? If we did wouldn't ticket touts be out of business? After all touts stay in business because we are willing to pay their (unjust?) prices, which seems to mean our preference for a just price can't be that stubborn. Those going to the tout can't have much of a "hard-wired refusal to accept something other than the customary price", by definition. Why is it that this "stubborn preference" prevents the promoter from raising his price but doesn't also prevent the tout from charging a higher price?
Our stubborn preference for a just price evolved in a setting that is no longer common; but evolution does not respond quickly, which may be why we still shriek with outrage at price hikes. It would also explain why ticket touts still make a living.
Also what sets the "customary or just price"? In the case of concert tickets wouldn't the price originally set by the promoter be the customary price? Isn't it in comparison to this price that the touts price would be called unjust? But why can't the promoter change this price? Note that different concerts by different performers have different prices, so there seems to be many just prices out there. Also different concert tours by the same performer have different ticket prices and these tours have different prices across countries. This may just be price discrimination but if promoters can discriminate then how seriously can we take the idea that there is a "customary or just price"? Which price is the just or customary one? And if under pricing doesn't maximise profits the promoter has a big incentive to increase the price.
I guess I must be missing something in the Harford argument.
Update: John Fountain has a entry on his blog on the reselling of tickets for rugby world 7's event in Wellington, see ticket scalping rugby world 7's: for or against?