Surge Pricing Like a Boss

When Bruce Springsteen decided to do a run of shows at a Broadway theater with fewer than a thousand seats, he appeared to reject the laws of economics — or at least what would seem to be in his financial best interest.

He limited ticket prices to between $75 and $850 and has been allocating them through a lottery that includes identity verification. His goal was to prevent scalping. Yet not everyone who sought tickets got them at those prices. The tickets that have leaked onto the open market on StubHub ranged in one recent search from $1,200 to $9,999.

It sure looks as if Mr. Springsteen left a great deal of money on the table …. After all, some people got tickets for $75 for which others were willing to pay four figures.

That is from Neil Irwin, “Why Surge Prices Make Us So Mad: What Springsteen, Home Depot and a Nobel Winner Know,” New York Times, October 14, 2017. [Link in source.] Irwin discusses dynamic prices and consumer interests for concert tickets, electric power, hardware after disasters, and rush hour traffic. Uber, too, gets discussed.

The recent Nobel Prize winner Richard Thaler gets a mention:

“A good rule of thumb is we shouldn’t impose a set of rules that will create moral outrage, even if that moral outrage seems stupid to economists,” Mr. Thaler said.

Merchants have always known, and economists have known since 1986 (Daniel Kahneman, Jack Knetsch, and Richard Thaler. “Fairness as a constraint on profit seeking: Entitlements in the market.” American Economic Review) it is bad for business to make your customers angry. (Which is not the same thing as saying we should have laws to prohibit price increases that may trigger moral outrage. Let businesses assess their local situation and make their best judgment about prices – yes, even after disasters.

Irwin’s article moved from concert tickets to electric power prices, hypothesizing about power consumers paying market prices to stay cool during a summer heat wave. Could promote efficiency, he said, with “incentives on high-demand days for consumers to set their air-conditioners a few degrees higher or to postpone running their washer and dryer till the overnight hours.” As a result, some old, polluting, rarely-used generation units could be retired from service, he suggested. Sounds good.

Except, maybe rich people would not bother to save a few bucks by dialing their air conditioners back over the peak and poor people may be forced into uncomfortable and perhaps unsafe conditions during heat waves when they can’t afford to pay the spiking prices.

“I’m a big believer that you don’t just give people a raw price signal, but provide them with support and financing to invest in the infrastructure to respond appropriately,” said Daniel Esty, a Yale environmental law professor and former commissioner of Connecticut’s energy and environmental protection agency. “Even better over time would be a system where people don’t have to think about it, where smart appliances are connected to a smart grid that would enable them to do their part in a kind of invisible-hand sort of way.”

The article also examines:

  • The dynamic pricing policies of Elevate Energy in Illinois as producing savings for consumers (and the environment) while avoiding the spectre of angry consumers.
  • Home Depot’s disaster policies – freezing prices while mobilizing a vast, logistically-sophisticated supply response.
  • Dynamic toll pricing during rush hour traffic in Northern Virginia, and other congestion pricing experiments.
  • The article wraps up discussing the lesson Uber has learned from surge pricing, including when not to do it and how to minimize consumer outrage when prices rise.

Consumer antipathy to surge pricing can have real negative effects for consumer welfare. After emergencies, for example, sometimes gas stations shut down rather than go to extraordinary efforts to resupply at high costs. But consumers are worse off with supplies unavailable than they would be if supply was available at a high price. (Here is a behavioral economics challenge: why do consumers seem to prefer gas stations to be shut down rather than have gas available at temporarily high prices?)

For these reasons I wish Thaler’s message did not stop at “don’t make your customers angry,” but rather went deeper to explore ways to lessen customer anger at pro-consumer actions by suppliers. Uber and Home Depot have taken somewhat different approaches, but both offer lessons to merchants interested in surge pricing like a boss.