Gas stations in New Jersey do not have awnings to protect customers from the rain. Let us presume for the moment that due to some combination of inertia, regulations and initial costs, it is not practical for them to create such awnings in the short term. Now suppose that New Jersey legalizes self-service. 90% of the time it is not raining, and the customers gain $0.25 of net utility from the cheap gas that comes from self-service. However, 10% of the time it is raining or snowing or something else unpleasant, and in those cases customers would on average be $5 better off if someone pumped their gas for them so they didn’t have to get out of the car. Some even get to avoid ruining their $60 haircuts.
A few stations switch to self-service. Ninety percent of the time, the sun is shining, and most customers choose to save a marginal amount of money and go to the self-service stations. With business drying up, more and more stations switch over, until most stations are self-service.
Then the rain comes, and everyone gets wet and miserable. The customers complain about how good things were in the old days with full service and say there ought to be a law!
One chain tries the obvious, which is to stay full-service, take a small loss when the sun is shining, and then charge an extra $4 per customer when it rains to make up for it. The customers go ballistic. Profiteer! Exploiter! Price gouger! Boycotts are announced and state senators are lobbied. Governor Christie warns that this is illegal activity under his interpretation of New Jersey law, the same way gas stations were not allowed to raise their prices after hurricane Sandy resulting in no one being able to buy gas without huge lines. The public cheers and his presidential campaign gets a boost, and the last of the full service branches go down. Self-service wins, everyone is miserable, and legislation gets reintroduced to return New Jersey to full service. Christie boasts that the repeal, passed over his veto, was a huge mistake, and adds mandatory self-service to his national platform, but loses anyway because he’s Christie.
What went wrong? Fundamentally, the problem is that consumers are unwilling to let prices change to meet supply and demand. Allocating scarce resources to those who value them most, and rewarding those who provide those resources so that people are encouraged to keep potentially scarce resources on hand, makes you history’s greatest villain. In the case of rain and gas stations, a few hairstyles get ruined and people are annoyed. During peak hours, movie seats and restaurant tables go to whoever was willing to make plans far enough in advance, rather than whoever actually values the experience. During real natural disasters like hurricane Sandy, it means the stores all run out of food and bottled water, and the gas stations run out of gas, and everyone spends all their time on lines, because the people who have real need can’t buy. This isn’t getting better.
When it rains in New York City, people go out onto the sidewalks with umbrellas. They charge a premium price. This is a very good thing, because otherwise they would not be standing by waiting for it to rain, and if I get caught in the rain without an umbrella, I can get out of it. Technically, however, they’re breaking the law, and people get pretty mad about this, calling it ‘taking advantage of people.’ I often wonder about that term, it also came up last night at the rationalist meetup: Companies are taking advantage of people! You don’t say! Is that supposed to be a bad thing?
This is not a call for people to understand economics, grow up and pay these hardworking Americans their due for keeping emergency supplies on hand. If I thought that would work, I would totally do that, because that would be a huge win. You never know; please do share that message! Maybe Uber’s hard work wearing the black hat will warm people up to the idea a little.
The problem I’m actually wondering about is related but less clear, and has no obvious right answer that I can find. What people regularly buy allows profit to be made on a regular basis, and that is how you pay the overhead to run a business like a gas station or a store. If something is being bought all the time, it also means that a lot of places are offering to sell it. That item in general (e.g. gas or milk) provides a ton of utility if the alternative was to go without, but the utility of another place to get gas is only large if the next gas station is far away. If it is across the street, the only utility is that they are keeping each other honest on price, so you might save a few pennies.
The sheer amount of gas purchased is causing placed to have great incentive to hijack sales from each other. When this means price competition or quality competition, that’s great; without price competition we’d pay a lot more for most things. When that means a race to the bottom on price because everyone only has enough attention to compare prices, resulting in a sacrifice of everything else (for example, on airlines, which have migrated their fees into secret compartments) or the loss of a little extra service when that service would have been efficient (in the sense that it’s easier for an employee to do a thing, or their time is less valuable than yours, or something similar). Why in the world are customers now bagging their own groceries? It makes no sense… unless people are being trapped by comparisons into looking at headline prices and this is forcing the hand of grocery stores.
Even more toxic is the rush to hijack sales based on location. If I have a source of milk two blocks away, that is good enough for anyone, and I’d prefer to have a diversity of other things available for purchase at other places. Instead, someone opens up another drug store one block away… often a copy of the same store that is also two blocks away! The reason they do this is to hijack sales by being marginally closer, and therefore better, than the competition. The result is that a huge percentage of store fronts end up being effectively wasted on drug stores and banks, and endless copies of the same chains, when far more utility could be had with something more unique, but which would get less business.
I have no idea what to do about this, even in theory. But it is clearly a problem, and it would be great if we could solve it.
Follow Up To: Full Service
Gas stations in New Jersey do not have awnings to protect customers from the rain. Let us presume for the moment that due to some combination of inertia, regulations and initial costs, it is not practical for them to create such awnings in the short term. Now suppose that New Jersey legalizes self-service. 90% of the time it is not raining, and the customers gain $0.25 of net utility from the cheap gas that comes from self-service. However, 10% of the time it is raining or snowing or something else unpleasant, and in those cases customers would on average be $5 better off if someone pumped their gas for them so they didn’t have to get out of the car. Some even get to avoid ruining their $60 haircuts.
A few stations switch to self-service. Ninety percent of the time, the sun is shining, and most customers choose to save a marginal amount of money and go to the self-service stations. With business drying up, more and more stations switch over, until most stations are self-service.
Then the rain comes, and everyone gets wet and miserable. The customers complain about how good things were in the old days with full service and say there ought to be a law!
One chain tries the obvious, which is to stay full-service, take a small loss when the sun is shining, and then charge an extra $4 per customer when it rains to make up for it. The customers go ballistic. Profiteer! Exploiter! Price gouger! Boycotts are announced and state senators are lobbied. Governor Christie warns that this is illegal activity under his interpretation of New Jersey law, the same way gas stations were not allowed to raise their prices after hurricane Sandy resulting in no one being able to buy gas without huge lines. The public cheers and his presidential campaign gets a boost, and the last of the full service branches go down. Self-service wins, everyone is miserable, and legislation gets reintroduced to return New Jersey to full service. Christie boasts that the repeal, passed over his veto, was a huge mistake, and adds mandatory self-service to his national platform, but loses anyway because he’s Christie.
What went wrong? Fundamentally, the problem is that consumers are unwilling to let prices change to meet supply and demand. Allocating scarce resources to those who value them most, and rewarding those who provide those resources so that people are encouraged to keep potentially scarce resources on hand, makes you history’s greatest villain. In the case of rain and gas stations, a few hairstyles get ruined and people are annoyed. During peak hours, movie seats and restaurant tables go to whoever was willing to make plans far enough in advance, rather than whoever actually values the experience. During real natural disasters like hurricane Sandy, it means the stores all run out of food and bottled water, and the gas stations run out of gas, and everyone spends all their time on lines, because the people who have real need can’t buy. This isn’t getting better.
When it rains in New York City, people go out onto the sidewalks with umbrellas. They charge a premium price. This is a very good thing, because otherwise they would not be standing by waiting for it to rain, and if I get caught in the rain without an umbrella, I can get out of it. Technically, however, they’re breaking the law, and people get pretty mad about this, calling it ‘taking advantage of people.’ I often wonder about that term, it also came up last night at the rationalist meetup: Companies are taking advantage of people! You don’t say! Is that supposed to be a bad thing?
This is not a call for people to understand economics, grow up and pay these hardworking Americans their due for keeping emergency supplies on hand. If I thought that would work, I would totally do that, because that would be a huge win. You never know; please do share that message! Maybe Uber’s hard work wearing the black hat will warm people up to the idea a little.
The problem I’m actually wondering about is related but less clear, and has no obvious right answer that I can find. What people regularly buy allows profit to be made on a regular basis, and that is how you pay the overhead to run a business like a gas station or a store. If something is being bought all the time, it also means that a lot of places are offering to sell it. That item in general (e.g. gas or milk) provides a ton of utility if the alternative was to go without, but the utility of another place to get gas is only large if the next gas station is far away. If it is across the street, the only utility is that they are keeping each other honest on price, so you might save a few pennies.
The sheer amount of gas purchased is causing placed to have great incentive to hijack sales from each other. When this means price competition or quality competition, that’s great; without price competition we’d pay a lot more for most things. When that means a race to the bottom on price because everyone only has enough attention to compare prices, resulting in a sacrifice of everything else (for example, on airlines, which have migrated their fees into secret compartments) or the loss of a little extra service when that service would have been efficient (in the sense that it’s easier for an employee to do a thing, or their time is less valuable than yours, or something similar). Why in the world are customers now bagging their own groceries? It makes no sense… unless people are being trapped by comparisons into looking at headline prices and this is forcing the hand of grocery stores.
Even more toxic is the rush to hijack sales based on location. If I have a source of milk two blocks away, that is good enough for anyone, and I’d prefer to have a diversity of other things available for purchase at other places. Instead, someone opens up another drug store one block away… often a copy of the same store that is also two blocks away! The reason they do this is to hijack sales by being marginally closer, and therefore better, than the competition. The result is that a huge percentage of store fronts end up being effectively wasted on drug stores and banks, and endless copies of the same chains, when far more utility could be had with something more unique, but which would get less business.
I have no idea what to do about this, even in theory. But it is clearly a problem, and it would be great if we could solve it.