Economics, economics everywhere, even more so as spring has sprung
We may not be quite like the mythical homo economicus, but every year when spring arrives in the Northern hemisphere, along with the return of blossoms and migratory birds, we see evidence popping up of the profound economic nature of our species.
All manner of businesses that went into hibernation because they would not survive the (economic) winter climate tentatively start up again, luring tourists and locals alike. On a particularly nice day recently, we visited a little harbour town on the English south coast. It was quieter than we remembered it, but it was a weekday, and this trip was earlier in the year than any of our previous visits.
So we were a little surprised to see the little booth inviting people for a half hour river cruise open for business. There didn’t seem to be all that much demand, and yet they appeared to operate a full schedule, every 45 minutes. The cruiser is a relatively modest affair, seating about a dozen people along the sides, a simple canopy all there is to protect the passengers from the elements. From my vantage point on they quay I saw it return from a trip, with on board just one young couple with their two small children.
The (not so ir)rational skipper
With tickets priced at £7 for an adult, I wondered about the economics of the operation. The skipper is needed for more than just the sailing time — say 45 minutes, so even at minimum wage the cost of one trip would be more than £6. A small outboard engine burns about 9 litres of fuel an hour, adding another £5 or so for a 30-minute trip. Add depreciation and maintenance of the boat, the wage of the guy in the booth selling the tickets between 10am and 4pm, and the rental of the jetty, and this very trip could not possibly have broken even.
It is of course important to look at the bigger picture. Some of the relatively scarce tourists early in the season might come back later on, perhaps even in a larger party. Or they might just tell others who might visit later on. Seen like this, a loss leader might be a sensible marketing investment, with a payback in peak tourist season.
But as the next sailing was getting ready to set off, this time with four adults, I wondered about the empty seats on the boat. Hotels and airlines often operate ‘last minute’ schemes, selling the remaining capacity at heavily discounted prices to fill empty rooms and seats. The marginal cost of an additional guest or passenger is quite small, and so most revenue goes straight to the bottom line. It’s a very rational thing to do. Should the skipper do the same? Why doesn’t he? Is he irrational or what?
For the river cruise the marginal cost would be negligible: a few additional bums on seats would be no burden for the motor. But look at the role of information, and another picture emerges. Prospective hotel guests and air passengers know that there are sometimes cheap last-minute opportunities, but they don’t know exactly when. The hotels and airlines have a much better view of this, but they don’t tell their customers. Because of this information asymmetry, certainty of having a seat or a room comes at a (full) price. Since for most travellers the need for a flight or a room is connected to other commitments, their need for security means that they will pay for this certainty, whether it is necessary or not.
Not quite so for the skipper. If he were to offer the empty seats at a reduced price to the people near the jetty, he would have a hard time concealing the information when his little boat will be full and when it won’t. A tourist watching the trips from the quayside would quickly figure out which trips typically have seats going spare. For a while there might still be some naïve customers who pay the full price. But the information would quickly spread, and soon nobody would buy a standard ticket, and everyone would linger around the jetty, waiting for the discounted fares.
There is another case of information asymmetry that does not apply here. When you stay in a hotel or take a flight, you do not know whether others have paid the same as you, or a lot less. Here, however, full-fare paying customers can see others can enjoy the same for a fraction of the price, and they might not appreciate that. But they paid the full amount willingly, on the basis that they found it good value for money, didn’t they? Sure, but people implicitly assume that prices are fairly applied to everyone. If that turns out not to be the case, they will feel they are being cheated. Aside from the potential argument with the skipper this might lead to, the information about how he acts will also spread, and that won’t do the reputation of the cruise firm much good.
So, on second thoughts, once you introduce information into the transactions, the skipper is probably not quite that irrational.
Rearranging the (prices of the) deckchairs
The same day, a tweet caught my eye, announcing that a season ticket to sit down in London costs £120 ($170, €140). It concerned of course the price of a deckchair in one of the London Parks. That sounded quite big sum. You could buy a deckchair four times over for that kind of money.
There is of course a bit more to this than meets the eye. Looking at the various rental options, £1.80 ($2.50, €2.00) — less than the price of a coffee — for an hour in the sunshine in more comfort than on a hard bench, and not having to worry about grass stains on your skirt or trousers, well that doesn’t seem quite so bad.
Imagine you enjoy having your lunch in the park whenever the weather allows, just for an hour. For the cost of 67 such lunch hours (covering about 60% of the number of workdays between mid-April and end-September) you’d get a season ticket for unlimited use. That’s not an unreasonable deal, and if you’re a regular and the weather is playing ball, you may well end up in the money. You also don’t need to faff around with small change every day — and paying upfront may nudge you out of the office and take a proper lunch break when otherwise you might be tempted to the horrible habit of eating your lunch at your desk.
But figuring that out is a lot of cognitive effort which most people won’t make, and the £120 headline figure might well put them off the idea. The offer might look a lot more attractive if it were framed as ‘pennies-a-day’ — something like “unlimited use of a deckchair all season for less than £1 per day”. That small amount could even be compared to that of a latte, or of an entire lunch — a case of mental accounting — to make it look even more insignificant. Applying some behavioural insights might improve the chair rental operator’s season considerably.
To conclude this vernal ramble, a little vignette. Last weekend I noticed that the boat hire place in one of our local parks was open too. I mean, I really, really noticed it. If the presence of rowing boats and pedalos on the river didn’t make it blindingly obvious they were open, there was a message on every other swan-shaped pedalo in big letters: “boat hire open”.
My first reaction was, “Well duh”. But then it occurred to me that this was actually a very enterprising ruse. For a start, I was spending a lot more time thinking about boat hire than I otherwise would have. More importantly, while otherwise the sight of the water craft from the corner of my eye might not even have registered, the presence of the letters was reinforcing the message, pushing it into my conscious attention. Both may well give a casual stroller through the riverside park a little nudge towards including a little self-propelled excursion on the pretty river Avon.
And I smiled at the clever insight of the boat operator. When you look at the world through economics glasses, you never cease to be intrigued by our species, especially on a nice early spring day.
Originally published at koenfucius.wordpress.com on April 27, 2018.
Thanks for reading this post. If you enjoyed it, do give it some applause (that makes me feel good, and it helps others find it too!) by clicking or tapping the 👏 button hereabouts. And do spread the love — use the Facebook or Twitter buttons, or simply copy the link into your social media platform of choice. Thank you!