Economists do not understand the opposition to congestion pricing

Michael Giberson

A few recent news articles on congestion has Peter Klein at Organization and Markets asking, “Why the Resistance to Pricing?

When the quantity demanded exceeds the quantity supplied — causing shortages, delays, congestion, misallocation — the solution is to raise the price. Every freshman economics student knows this. Why, then, are regulators, industry groups, and consumer representatives so often opposed to rationing by the price mechanism?

Klein offers two examples, the airport congestion issue (citing a Reason Foundation commentary and my blog post of last week) and a Wall Street Journal story on internet congestion. In the case of pricing proposed to help clear airport congestion, Klein draws upon the quote I used from the Air Transport Association, “We are unalterably, adamantly opposed to it.” From the Wall Street Journal article on internet congestion, Klein notes the extensive interest in technological solutions — bigger, better, faster, more. “All purely technological remedies. No mention of pricing,” he says.

Scott Wallsten riffed on the same topic in a commentary in response to news report that internet service provider Comcast was sometimes limiting capacity usage by customers who use file sharing services:

While this story immediately degenerated into a fight over net neutrality, economists’ ears should have perked up. If network traffic needs to be “managed,” then something is probably wrong with prices. Getting prices right–by charging heavy users for the costs they impose on everyone else, for example–would go a long way towards reducing the need to manage the network.

Wallsten draws on analogies to road use, electric power, and water utilities, to suggest that rates for high-speed internet use could be priced by some mechanism other than a flat access fee. “Consider highways. … Policymakers have generally tried to deal with congestion by building more roads” — the technological solution rather than pricing. Pricing proposals to address congestion, like HOT lanes, often face opposition even from parties would be benefit from faster travel.

Klein asks, “Is [the opposition to pricing] simply Bryan Caplan’s anti-market bias? Is it interest-group politics? Or is there something specific people don’t like, or don’t understand, about prices?”

It is possible that any proposed price will make some people worse off, possibly almost unavoidable, so some part of any opposition may be simple self-interest. But I think there may be a deeper phenomena at work, in Klein’s words, “something specific people … don’t understand about prices.”

People naturally understand the allocative function of prices — the paying you X so I can get Y — but have a harder time understand the coordination function provided by prices — the paying you enough X so that other people don’t take all of the Y first. Particularly when the value of the coordination function varies dramatically over time (rush hours, peak loads, high season at vacation spots), it seems harder to grasp the abstract service of coordination provided by prices.

Maybe there is work in the behavioral economics literature about congestion pricing, or maybe some sophisticated economics experiments have teased out these differences. I don’t know, but if not it seems like a promising research topic: Why the Resistance to Prices?

Airlines prefer customers take delay risks rather than face market mechanisms to allocate capacity at JFK, other congested airports

Michael Giberson

A New York Times article reports on negotiations initiated by the U.S. Department of Transportation seeking to get airlines to voluntarily give up landing slots at Kennedy Airport, one of the nation’s most congested airports. (Many other stories on this topic are available.)

After a pep talk by the secretary of transportation, Mary E. Peters, and the acting administrator of the Federal Aviation Administration, Bobby Sturgell, the airline executives were taken to separate rooms and brought back one by one to talk to government officials about their schedules.

At some hours, Kennedy has more than 100 scheduled arrivals and departures. The F.A.A. said the airport actually handled 80 or 81 per hour this summer, which is the maximum the Transportation Department wants the airlines to schedule.

The airlines said Kennedy could handle more with better equipment and procedures, and have complained that the department’s target number is too strict. Another problem is that some traffic may migrate to Newark, adding to delays there.

The government is hopeful it can get “voluntary” reductions, which would then be codified into a regulation. If the airlines do not “volunteer,” the government has said it could set quotas and assign slots. But, Ms. Peters said, “We have high hopes for market-based incentives.”

The D.O.T. has said it may order landing fees that vary by the hour as an incentive to move flights to off-peak periods. But Ms. Peters said, “We may very well need scheduling reductions to help solve congestion in the near term.”

… Years-old federal controls on how many planes can use Kennedy ended on Jan. 1. Since then, traffic jumped 20 percent, according to the F.A.A., to 1,200 flights a day from 1,000. In August, it was 1,300 flights a day.

According to the F.A.A., one result is that there are 77.4 delays per 1,000 landings or takeoffs so far this year, continuing a steady rise — there were 20.9 in 2003, 27.5 in 2004, 39.6 in 2005 and 60.4 in 2006.

The meetings did not run smoothly. USA Today: “The government’s effort to cut record flight delays at New York got off to a bitter start Tuesday when the airlines’ trade organization threatened to challenge new controls in court.” The Cox News Service: “It appears that the federal regulators ‘intend to impose cuts,’ said James May, president of the Air Transport Association, which represents the major carriers. ‘We are unalterably, adamantly opposed to it.’ ”

Economists at the U.S. Department of Justice recently produced a paper advocating the auction of airport take-off and landing slots. Tom Whalen, Dennis W. Carlton, Ken Heyer, and Oliver Richard explain the source of some of the problems and some suggested approaches:

Airlines’ private incentives to schedule flights to serve more destinations and offer passengers more choice in departure times do not take into account the delays that their own flights impose upon other airlines because airlines do not face the proper price incentives to use scarce airport capacity. Consequently, airlines schedule too many flights, generating delays that ripple across the highly integrated airline network and adversely affect all passengers. One approach to solving this problem might be to get the airlines together and have them collectively hammer out a solution. … Such collective decision-making would not necessarily benefit consumers. Indeed, collective decision-making by actual and potential rivals raises serious risks to competition.

The current approach is only slightly more problematic than industry-based collusion – as described above the Transportation Department employs, in essence, a combination of administrative fiat, bureaucratic saber rattling, and moral suasion to extract reluctant corporation compromise. You don’t need a Nobel Prize for mechanism design theory to spot the flaws in this system.

Whalen, et al., write, “Our preferred method to allocate scarce airport capacity is to auction slots for landings and takeoffs by time of day and to convey upon their purchasers well-defined property rights.” The slots would be resalable, so airlines have the flexibility to reorganize their flight schedules to changing demand, and could come with cancellation priorities that would come into play if weather or other conditions temporarily reduced capacity at an airport.

While the airlines oppose administrative cuts, most proposed market-based mechanisms really seem to make them crazy. The Washington Post story this morning quoted airline executives as saying that “congestion pricing and caps will curtail flights to towns and cities served by smaller planes,” and complaining that the government hasn’t done enough to expand capacity through New York airspace and at the Kennedy airport.

Of course the point is that flights are already being curtailed, via congestion that spills over through the air transportation system. Only, in the present system much of the risk and cost is hidden in unrealistic flight schedules that leave travelers guessing rather that made transparent through prices that adequately coordinate consumer preferences and air transportation costs.

The proposal to auction airline takeoff and landing slots has been around for at least since 1982, when “A Combinatorial Auction Mechanism for Airport Time Slot Allocation,” by Stephen Rassenti, Vernon Smith, and R. Bulfin, was published in the Bell Journal of Economics.

Strictly speaking, auction of airline slots could be done airport by airport, and done only for highly congested airports. While such an approach would be simple to implement, it presents bidding challenges to the airline. If the auction for Airport A happens before the auction for Airport B, and the airline wants to fly a route from A to B, it needs to know the price for landing at B before it can submit an efficient bid for a takeoff slot at A. The Rassenti proposal, the first published description of a combinatorial auction, provides a mechanism for addressing these and other complications.

The Washington Post noted, “operations are complicated by the fact that an unusual range of aircraft types use JFK’s runways, a mix of small regional jets, medium-size planes and wide-body jets. Smaller planes need more space to take off safely behind larger jets. Properly sequencing those flights during busy periods can be a challenge…” A combinatorial auction is designed to manage these kinds of interacting constraints on the system. It may sound complicated, but remember that airlines have a great deal of experience in using dynamic pricing systems to allocate scarce resources when the object is maximizing ticket revenue paid by consumers. Slot auctions just employ similar tools to induce airlines to better coordinate their use of scarce air travel resources. Yes, consumers traveling through popular airports at popular times will end up paying higher ticket prices, but at the same time they will be more likely to arrive on schedule.

Various proposals for extending and improving upon the ideas developed in the Rassenti article have appeared over the last 25 years – but really, improvement is beside the point, the point is to get started. While airport-by-airport auctions may be the technological equivalent of a barnstormer’s bi-plane, the current administrative jawboning is no more than a hot air balloon.

[HT to the Antitrust & Competition Policy Blog for the link to the Whalen et al. paper.]

Capacity Market Costs Drive Utility to Want to Leave PJM, Join Midwest ISO

Michael Giberson

Duquesne Light has announced it wants to drop out of PJM and join the neighboring Midwest ISO, citing the high costs emerging from PJM’s capacity market as their motivation. The capacity market is called the “RPM” market after the “reliability pricing model” which serves as the underlying pricing mechanism. Duquesne has filed a request with FERC seeking a Commission order directing PJM to exclude the utility from the next running of the RPM auction, scheduled to begin next week. The Energy Legal Blog presents a few more details, and notes a few other cases in which utilities are eying the exits.

The Pittsburgh Tribune-Review made brief mention of the request in a column of energy-related notes:

The Downtown-based utility joined PJM in 2005, but said the organization’s price changes since then would increase its costs in coming years. “We don’t feel that is what is best for customers,” spokesman Joe Vallarian said. … The company said it may join another grid operator based in Indiana; it wants to avoid costs related to the PJM auctions.

The Electric Power Supply Association (EPSA) responded in the filing at FERC requesting the agency to deny Duquesne’s request. In a news release, EPSA stated:

“FERC should deny Duquesne’s complaint on the grounds that Duquesne remains a signatory to PJM’s reliability agreement and, contrary to what Duquesne has claimed, there is no credible information that the utility will not be in PJM in 2009,” said John E. Shelk, President and CEO of EPSA.

EPSA is the trade association representing the “competitive power supply industry,” i.e. non-utility generators, and its members will be net recipients of payments from the PJM’s RPM markets. Duquesne Light, on the other hand, as predominantly a wires-and-retail power services company will be net payers into the RPM markets.

James Grimmelmann on Errors Published in the New York Times

Michael Giberson

Quoting Grimmelmann:

First off, the Times pleads its inability to re-report every challenged story. Fair enough….

It’s one thing not to revisit stories as new information becomes available. (The Times isn’t Wikipedia, after all, and we shouldn’t hold it to the same higher standards of timeliness.) But it’s something else not to append corrections to articles whose reporting was no good. The Times pleads lack of resources: We’re too busy making mistakes to fix them.

The Times isn’t Wikipedia? Correct. Just so.

Home of the Groove: Internet Radio Not Dead Yet

Michael Giberson

I stumbled across the Home of the Groove blog some months back. It turned out to be a great place to delve deeper into New Orleans funk and R&B and related musicality. And recently, the Home of the Groove has sprouted its own internet radio station running a 10-hours and growing playlist of New Orleans lost hits, arcana, and other rarities.

Internet radio is not dead yet. Let’s hope it survives the continuing loving embrace of SoundExchange.

PJM’s Newly Ex-CEO: PJM Never Really Wanted a Market Monitor

Michael Giberson

Yesterday, PJM Interconnection announced the sudden retirement of CEO Phillip Harris. In a press release, the PJM board stated:

We are announcing that President Phillip G. Harris has elected to retire from PJM. We want to acknowledge Mr. Harris’ considerable contributions to PJM and our industry over his many years of service. Without his guidance and vision, PJM would not enjoy the reputation for technological and operational excellence that has made it the benchmark for regional transmission organizations the world over.

Restructuring Today reported today that Harris was asked to leave the position after (allegedly) telling PJM staff at a PJM event that the organization never wanted a market monitor in the first place. PJM remains embroiled in a dispute with its market monitor over the degree to which the organization interfered with the ability of the market monitoring unit to do its job. As Harris discovered, it is a very sensitive subject.

Background – previous posts on market monitoring and on PJM’s market monitor troubles:

U.S. Senator Weighs in on PJM Dispute with Market Monitor
PJM Market Monitor Reports Interference from Management
The Kluge That We Need: Local Market Power Mitigation Measures
Ex Post Market Monitoring in Electric Power Markets
Why do we have Electric Power Market Monitors?
Market Monitors in Electric Power Markets, II
The Role of Market Monitors in Electric Power Networks

Auction Seeks to Provide Competitive Prices for the Discovery of Network Goods

Michael Giberson

A Swiss software security research company, WabiSabiLabi, is establishing an online auction site to allow security researchers to auction off discoveries of software vulnerabilities. In their press release, they said:

Recently it was reported that although researchers had analyzed a little more than 7,000 publicly disclosed vulnerabilities last year, the number of new vulnerabilities found in code could be as high as 139,362 per year. Our intention is that the marketplace facility on WSLabi will enable security researchers to get a fair price for their findings and ensure that they will no longer be forced to give them away for free or sell them to cyber-criminals.

Yes, they will screen the bidders in the effort to determine that they aren’t “cyber-criminals,” and they will test reported vulnerabilities before allowing an item to be put up for auction. The Washington Post described vulnerability researcher Dino Dai Zovi as excited about the vulnerability auction service:

“I can see this service creating much more incentives for researchers to find flaws,” Dai Zovi said. “Not everyone is willing to spend 20 to 40 hours looking for vulnerabilities in software just to receive a little thank-you note in Microsoft’s security advisories.”

The discovery of software vulnerabilities provides something of the nature of a network or club good. Presumably the software vendor – the provider of the initial good or service around which the network grows – would have an incentive to pay for acquisition of this information so as to put out a better product. But if the standard offer of payment is “a little thank-you note,” perhaps the existing market for such intellectual property is not yielding competitive prices.

U.S. Senator Weighs in on PJM Dispute with Market Monitor

Michael Giberson

From The Star-Ledger:

U.S. Sen. Robert Menendez today urged a federal agency to hold hearings into whether the company that runs the regional power grid is undermining the work of a monitor whose job is to guard against manipulation of electricity prices.

In a letter to the Federal Energy Regulatory Commission, Menendez (D-N.J.) said allegations by the monitor, Joseph Bowring, against grid operator PJM Interconnection are troubling. The senator said there is mounting evidence that PJM management is undermining the monitor’s work by stripping him of resources, denying him vital data and censoring his reports.

Auctioning the Airwaves, Google Style, II

Michael Giberson

The tech trade press seems abuzz with speculation over Google’s interest in the FCC’s spectrum auction rules. Google phone? Google wireless? Google the spectrum monopolist? Google turning your cell phone into a mobile AdWords delivery device?

All of this wild-eyed speculation seems a bit over the top to me, perhaps because the essential idea proposed by Google seems so sensible. In the letter (link below), Google wrote: “In particular, the Commission should clarify that the service rules governing the 700 MHz bands already allow the use of dynamic auction techniques, such as real-time auctions and per-device registration fees.”

Here’s the big idea: dynamic auction techniques, such as real-time auctions. Rather than having a telecom company buy a large chunk of spectrum in the hopes of eventually being able to fill it with subscribers, a spectrum wholesaler would own and auction off spectrum usage rights in small slices. Telecom companies could buy what they needed as they needed it. Or, eventually, wireless devices would buy the spectrum bandwidth needed, when they need it.

Prices in this resell auction would naturally be dynamic — going up and down with the demands placed on the available capacity — and dynamic pricing seems to make some people nervous. But really it is just about, as Google says in the letter, devising a system under which a “particular slice of spectrum ends up in the hands of the user who values it most at any particular time and place.” If your wireless fax isn’t time sensitive, just say so and your device will bid low. Need to talk to someone right now? Go ahead and pay the current price, and less time-sensitive uses of the spectrum will get out of your way. Most retail consumers would likely continue to sign up for wireless phone services like they do now – paying fees related to the level of service demanded – and the service provider taking the price risk in the secondary spectrum market. Over time, wireless devices, and their owners, will get smarter about buying and using the kinds of service they need.

Notice that two separate auctions are involved here. The first would involve the FCC auctioning off large amounts of spectrum to interested buyers, using one of the FCC’s existing auction designs or some improvement thereof. Google is proposing that the winners in that first auction be allowed to resell some or all of the spectrum purchased in a secondary auction, using dynamic auction processes and systems they hope to manage.

Adam Kovacevich, a spokesman for Google, said, “In general, it’s the belief of a lot of people in the company that spectrum is allocated in an inefficient manner.” The letter cites one report indicating that use in “any given geographic area averages some 5 percent of total available spectrum.” They think they can do better, and in the letter to the FCC they ask whether the rules will prevent them from trying.

NOTES: The Google letter to the FCC can be found at this link. (Thanks to Computerworld.) Another somewhat related news story, concerning a lawsuit over FCC rule changes in an earlier auction, is up at MarketWatch. Yesterday I posted Auctioning the Airwaves, Google Style.

Auctioning the Airwaves, Google Style

Michael Giberson

Google filed a proposal on Monday with the Federal Communications Commission calling on the agency to let companies allocate radio spectrum using the same kind of real-time auction that the search engine company now uses to sell advertisements.

The NYTimes article is a little short on the technical details of the proposal (I guess not everyone is a market design geek). Usually these filings turn up on the FCC website, but in a few brief attempts I haven’t turned up anything yet. I’ll let you know when I find it.

In the meantime, some additional details and commentary can be found at O’Reilly’s Radar, The Next Net, GigaOM, and bloggingstocks.

If it turns out that spectrum will be available via a continuous, dynamic auction, similar to how Google sells space for advertisements, it will raise the significance of auction theory work on the properties of that market design. For economists and other technical types, a good place to start is Hal Varian’s paper, “Position Auctions.” If you are new to auction theory, begin with Ken Steiglitz’s Snipers, Shills, and Sharks, a fine introduction. While the book focuses on eBay-style online auctions, it also discusses and provides citations on position auctions.