27 April 2012

Richness is multidimensional

Cheap Talk | Jeff | Something To Add To Your Shouting List For The Next Time You Find Yourself On A Rooftop

Airlines are using ever more sophisticated pricing strategies, sports teams and theaters are adopting dynamic pricing, even restaurants are using auctions to allocate scarce seating space. And the usual perception of this is that the consumer is being gouged. Auctions leverage competition among buyers and this drives the price up. Sellers are raising profits by eroding consumer surplus.

But as a counterpoint to this, here is a mostly unnoticed but fundamental principle of auction-like pricing schemes: they lead to unambiguously lower prices at the margin even when, indeed especially when, the seller is a coldhearted profit maximizer. [...]

The upshot of this is that the winners and losers from an auction system aren’t who you think. Auctions don’t favor the deep-pocketed compared to the small guys. Exactly the opposite. The marginal consumer is priced out of the market when a seller eschews an auction because then he must keep prices high. When a seller switches to an auction he lowers his reserve price and now the marginal consumer has a chance to buy at those low prices.
I've elided Jeff's explanation for why auctions help consumers. It is very elegant; I suggest you read it. In the meantime, I'm going to bang out some scattered thoughts about people's perceptions of auctions/markets/price-discrimination-based-allocation. I'm not sure how much sense the follwing makes, but I'm going back to my work rather than editing it. Read on at your own peril.

I agree with Jeff that most people think such allocations favor "the rich." The very concept of "the rich" is facile though. Some people are money-poor but time-rich or enthusiasm-rich or even luck-rich.

All allocation strategies will favor some type of person. For instance, imposing congestion tolls on roads tilts the balance towards the money-rich & time-poor, while eschewing tolls tilts the balance towards the time-rich. Many systems of allocating seats in special charter or magnet schools benefit the time-, enthusiasm- or luck-rich.

Many people think money-rich is bad because it is a "privilege" but do not consider the other riches. They react negatively when the status quo is changed in a way that they perceive as benefitting the money-rich. (Even though the intervention, as in the case of ticket auctions doesn't actually benefit the money-rich.)

Some people are were willing to sit in line for tickets, or reload a webpage many times every day in order to get their tickets. The ability to do those things is itself a privilege. Now some of the tickets that would have gone to the guy camping out in line will be distributed to people willing to pay more money for them. This isn't a transfer from the poor to the rich, but from the time-, enthusiasm- and luck-rich to the money-rich. Personally, I don't see a particular reason resources should be distributed to the lucky or those with time on their hands rather than those with money.

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