6 Comments

I agree with you that "The relevant question for thinking about which alternative that consumers would prefer appears to be whether the monetary costs and time costs with constant pricing are greater than the monetary costs and search costs with variable pricing" but I don't think it's clear why one would be greater than the other. The preceding passage where you go through the costs to the consumer uses the same logic that one would use to justify a variable price scheme.

"From the perspective of the customer, a constant [wait time] throughout the day creates a reliability in terms of [time] cost per unit of quality. Those with different [monetary] costs can therefore choose to eat at different times per day. Furthermore, consumers not only have reliable information about [time cost] per unit of quality, but also about the approximate [prices] at various different times per day."

"If it is noon and I want Chik-Fil-A, this pricing strategy allows me to show up and avoid a line. However, I have a maximum willingness to pay for a chicken sandwich. If I show up and the [time cost] is above my willingness to pay, I have to eat somewhere else or I have to come back later to check the [line]."

So there are also search costs to finding a restaurant that isn't busy. I return to the question you posed at the start. Why doesn't chik-fil-a monetize these costs? The price of the sandwich does change throughout the day, and this changing price (through the length of the line) already imposes search costs on consumers who need a quick bite. Search costs for prices don't seem like they would be higher than search costs for wait times. It's probably much easier to measure and post the prices online than the wait times.

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As I note, the costs of search are evidently higher than the costs of waiting. I say this because I don't see firms like Chik-Fil-A experimenting with variable pricing -- yet. Of course, that might not only be about search costs. One element of the Chik-Fil-A brand, or any brand for that matter, is that they provide a given quality at a certain price. Variable pricing might undermine that, although that probably depends on how variable the prices would actually be.

Regarding search costs and waiting costs, I would argue that once firms adopt the constant price strategy, people don't even really need updates on the waiting times. While there is some variation, people often do have an idea about how long that they would have to wait in line given the time of day.

Nonetheless, as I noted in a previous post, I think this depends on the magnitude of the search costs and I don't think that we should treat these search costs as something that is constant across time or across goods. Gas stations, for example, have variable prices. It also seems like the search costs are lower. If you are already in your car and you see the price of gas at one station, you don't have to stop. You can generally just continue driving to the next station and sample some additional prices at a pretty low cost. Apps and online ordering might sufficiently reduce the search cost such that variable pricing becomes more common.

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"I say this because I don't see firms like Chik-Fil-A experimenting with variable pricing -- yet."

This is fair, I buy the Uchicago reasoning here haha. Businesses across dozens of different industries and sizes avoid """price gouging""" like the plague. They aren't just irrational, but we need an amended model to explain the behavior.

"One element of the Chik-Fil-A brand, or any brand for that matter, is that they provide a given quality at a certain price."

This also seems true to me based on my experience, but it requires a model of why people care less about variable time costs than variable monetary costs.

"While there is some variation, people often do have an idea about how long that they would have to wait in line given the time of day."

I also agree with this, definitely my experience with Chik-Fil-A. However, this point also applies to variable prices. Since the variable prices and variable wait times are both based on the same variable demand. People would quickly get a sense of what the lunchtime prices would be versus that 4pm prices would be, just like they do with the time prices.

"Gas stations, for example, have variable prices."

This is true, but even gas stations in my area along the east coast have been running out of gas and hosting huuuuuuge lines. A main gas pipeline was disabled so supply decreased but the price didn't go up enough to monetize the rush on gas, even though they change their prices every day.

I hate to say it but I think that a model of why businesses aren't raising prices has include some animal spirits. People have very strong mood affiliation against raising prices, and this directly influences business reputation and also prods government punishment. Businesses fear the retaliation of the crowd.

Again, however, an explanation is needed as to why the crowd doesn't retaliate over really long lines even though they are functionally equivalent to higher prices.

Perhaps it is based on fairness norms in two ways. One is that the business is not directly benefitting from a bad event like a pandemic or a pipeline hack; they don't want to look greedy. The second is that time costs or progressive while prices are regressive. The same time cost is more expensive for someone with a higher income, but the same price is less expensive for a richer person.

Sorry for the long comment but I think this issue and your post are really interesting!

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No need to apologize. This kind of conversation is what Economic Forces is supposed to be all about. I agree with you in the sense that it seems easier to understand why businesses behave the way that they do given that the public seems to have a preference of "lines rather than prices", but it is harder to understand exactly why the public seems to have that view. It could be, like you suggest, that the it is an issue of fairness. Everyone has the same number of hours in the day, but people have different amounts of money. Of course, the *value* of those available hours do vary across people (and for reasons other than foregone income) and the fairness argument would need to wrestle with that.

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Great read!

"The relevant question for thinking about which alternative that consumers would prefer appears to be whether the monetary costs and time costs with constant pricing are greater than the monetary costs and search costs with variable pricing"

The internet has helped reduce search costs significantly, which made it easier for businesses such as ride hailing and food delivery apps to use variable pricing [Uber, DoorDash et cetera]

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Not sure if this is the correct venue, but question/idea for future post:

The Economist had an article last week about the opioid epidemic. They say: "When the DEA tested sample pills from drug seizures between January and March of 2019, 27% contained a lethal dose of fentanyl."

My question: why would a drug cartel sell a product that is likely to kill their customer 1-out-of-every-4 times their product is used? Surely it would be in their interest to keep their customers alive, to ensure future sales. Can this phenomenon be explained with microeconomics?

https://www.economist.com/united-states/2021/05/15/last-year-more-people-in-san-francisco-died-of-overdoses-than-of-covid-19

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