The Answer Is Transaction Costs

Baseball, Dollar Dogs, Apple Pie and Transaction Costs

• Michael Munger • Season 2 • Episode 4

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Why would a baseball stadium limit the number of $1 hot dogs per customer on Dollar Hot Dog Night? Find out as we work on this intriguing question posed by a curious high school student named HJ. Through the lens of transaction costs, we reveal how these promotional events are less about selling hot dogs and more about enhancing the overall (cheap!) game experience to attract new fans. Using a real-life example from a recent Mets game, we explore how such promotions can change the crowd dynamics, boost attendance, and ensure a positive atmosphere for everyone, even when things get a bit rowdy.

And the TWEJ:  A dad joke, because of course it is

Three apple pie prices (for one pie!)

Samuel Bagg's book The Dispersion of Power (Oxford)

If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !


You can follow Mike Munger on Twitter at @mungowitz


Speaker 1:

This is Mike Munger, the knower of important things from Duke University Baseball, hot dogs, apple pie and transaction costs. A new twedge plus this week's letter and more Straight out of Creedmoor. This is Tidy C. I thought they'd talk about a system where there were no transaction costs, but it's an imaginary system. There always are transaction costs when it is costly to transact, institutions matter and it is costly to transact. I got an interesting letter a while back and I had responded to it on email, but I thought I would take it up, this being baseball and hot dog season. Here's the letter. My name is HJ and I'm a 17-year-old high school senior taking my first ever economics class this semester.

Speaker 1:

I listened to your podcast with my dad and we both really enjoy it. We're listening to the episode about the $8 hot dogs versus the $1 hot dog and I have a question. You mentioned that the person selling the $1 hot dogs would set a limit on how many each person could buy, so that one person couldn't come along and buy them all and then start selling them for $5. My question is why would they want to prevent that? If they're making a profit from each of the $1 dogs, wouldn't it be in their best interest to sell all of them from the beginning and then just close down, then the person buying all of them and trying to sell them for $5 or $7 is assuming all the risk. Maybe they can't sell them all. Can you explain what I'm missing? Thank you Well, thank you, hj. The thing is, dollar hot dog night at baseball stadiums, especially professional baseball stadiums, is usually to attract people into the stadium. Now suppose I sold all the hot dogs to the first customer who then turned around and sold them to all the other customers for $5 each. I'm not sure I want someone handling my hot dogs and carrying them around in some old sack, but it would still defeat the purpose, even if that weren't a problem. Is that really dollar hot dog night? Everybody would be angry because only the first person got the dollar hot dogs.

Speaker 1:

The point is that a ticket and a hot dog and a Coke are a package. Now, maybe it's a ticket, a hot dog and a beer, maybe it's a ticket nachos and a milkshake, but there are several goods that go together to make up the baseball game experience. The teams are not trying to sell hot dogs. My business as a baseball team is trying to get new people to come to baseball games. So I have someone who has the concession contract and I let them charge pretty much what they want for hot dogs. But sometimes I will say charge pretty much what they want for hot dogs. But sometimes I will say I would like for you to sell hot dogs for $1 tonight. Now I'll have to pay them something. I'll have to put that a different set of arrangements into the contract.

Speaker 1:

The point is that on dollar hot dog night there's a discount on the ticket hot dog package. People who don't normally come to games might say, hey, that looks like a coupon, I'll take advantage of the discount. But if they got there and they weren't the first person that bought thousands of hot dogs and the hot dogs cost $5, they wouldn't come back. Word gets out they won't come at all.

Speaker 1:

The short version is the mistake is to think of this as selling hot dogs in isolation. But it's the stadium who pays the vendor to discount the hot dogs. The stadium doesn't want the first person in line to get all the benefit. They want new people to come for the dollar hot dog and then maybe come back next week and pay full price. Notice that the vendors outside the stadium don't have discounts like this. Only inside the stadium is a way of getting more people to buy tickets, but that only works if every person actually gets a $1 hot dog. So they aren't really selling hot dogs at all. In fact, notice, sometimes they'll give away t-shirts or bobbleheads as an inducement to buy the ticket. So think of the question in that context. It would be cheaper to give all the bobbleheads to the first person in line and then that person could turn around and sell the bobbleheads to everyone behind them Except. Well, no, you have to have a free bobblehead for each ticket holder. That's the reason that people are buying the tickets in some cases. Now, hot dogs are a little different because you can buy several and they're a dollar. They're not free. But it's the same principle it's an inducement to buy tickets, not a way to sell hot dogs.

Speaker 1:

Now, I did a little background work on this and found that in May 2024, a month ago, there was Dollar Hot Dog Night at Metz City Field. Now there was a sideline reporter, steve Gelbs, who dressed up as a hot dog and did a journalistic report I'm sure he's very proud of in front of the Dollar Wiener Boys, where he explained that the Mets normally sell 4,100, 4,200 hot dogs per game. For Dollar Hot Dog Night the team had ordered 70,000 frankfurters. One guy in the stands apparently decided to achieve spiritual oneness on with hot dog night and people started throwing hot dogs at him. So people must have bought six or eight and realize you know these are hot dogs. They came to understand the principle of sharply diminishing marginal returns after you've had four or five hot dogs.

Speaker 1:

The value of hot dog as a missile goes up. Well, at that Cubs-Mets game at Citi Field in May, the attendance was 22,880, and there appeared to have been 44,269 hot dogs sold, so almost two hot dogs per person. And since a lot of people didn't buy hot dogs I'm sure think about that there were a few people who bought a lot of hot dogs. Still, attendance was up slightly and the composition of the fans was probably different. There were people there who were not season ticket holders, maybe hadn't been to a Mets game before, hadn't been for a long time. So it was a way of getting new and different people in the seats.

Speaker 1:

So when I said before it was like a coupon, coupons are a way of practicing price discrimination. So I don't care about hot dogs and I come to the game. I'll come to the game anyway, but I don't normally come to the game. But I value the ticket. Hot dog package If you discount the hot dog part, that means that I'll pay full price for the ticket and maybe, having enjoyed the experience, I'll come back and maybe next time pay full price for a hot dog.

Speaker 1:

There's one final thing. The risk transfer explanation may work for some things, such as concert tickets. If I can sell all the tickets at a lower price, then scalpers will be able to make money if the concert sells out. But if it doesn't, they're left holding nearly worthless tickets. So I think there is something to your question about when concert venues sell tickets at a price that is less than the market clearing price, knowing that scalpers will buy up all the tickets and then resell them. There is a risk transfer argument there. So in any case, thanks for that letter. Whoa, that sound means it's time for the twedge.

Speaker 1:

This week's economics joke. An economist did a study. Apple pie cost an average of $3.50 per slice in Jamaica, $2.75 a slice in the Bahamas. There's a little more in some places, such as $4.25 in the Caymans and $4.30 in the Virgin Islands. The economist titled his study Pirates of the Caribbean. Well, just for fun, I checked for what is the most expensive apple pie in the Caribbean. The most expensive I could find was at Joe's Stone Crabs in Miami. It was $120 for a pie. The pie is eight slices, so that's $15 per slice. Now they do have free shipping, so go nuts folks. There really were pirates once in South Florida. They used to light fires to look like lighthouses to try to get ships to run aground so that they could salvage the cargo. Now apparently those pirates run hotel catering services and sell apple pies. I got a letter from RAKB. The letter goes like this your recent discussion on corner crossing caught my attention.

Speaker 1:

In all European jurisdictions I know of, there is a de minimis threshold for legal claims. This means that courts do not remedy minute infractions no fines, damages or injunctions. This contrasts with the case you discussed, where hunters crossed about 4 or 5 inches of private property, leading to an in-depth legal examination. In such cases, is there a transaction cost argument for implementing a de minimis threshold? My initial thought is that a de minimis threshold limits the relative transaction cost for the legal system because more minor infractions that have no significant effect on the property owner's utility are not adjudicated, thereby reducing the administrative burden on the legal system without any significant loss of value to the rights holder. But a de minimis threshold also fuzzies the limits of property rights, maybe increasing transaction costs under bargaining. If both are true, how do you decide when to apply a de minimis threshold and when not to? I'd love to hear your thoughts on this. Well thanks, rakb.

Speaker 1:

The de minimis threshold makes sense if the amount of damages at issue are small, in this case, the right of passage, the right of being able to cross over the corner. It's not clear to me that that is not very much value. Now you might be saying that since there is no damage to the property owners, they shouldn't be able to sue. But remember, the case in which I tried to argue that the question of damages is more complicated was the Steenberg-Holmes case, the Jacques versus Steenberg-Holmes case, where it was decided that the actual damages were substantial, even though the amount of monetary damage was small. The question is is the principle of property itself something we're going to uphold? So I think there's two different issues here. One is the question what is the principle?

Speaker 1:

And in this case, what was interesting about the corner crossing was that the assignment of rights under a de minimis threshold might make all the difference. Suppose we say that people have the right to travel across the corner and in fact they have the right to set foot on someone else's property, if they're just crossing and unless they do some kind of damage they can't be sued, that would be very different from saying that they don't have that right and the fact that they would benefit a small amount from being able to cross over and go hunting means that they could not sue to obtain the right. So basically, this is what I think really should be the Coase theorem. What the Coase theorem really says is that in the presence of transactions costs, the assignment of rights is crucially important. It really matters. So if it were very difficult to negotiate the right to cross over the corner, whether we assign the right to cross or not, the right to cross for the hunters would make an enormous difference, because then suing would be precluded because we'd be saying, well, it's not really doing a lot of damage to them. But it is an interesting question and I think the de minimis standard is true in many cases.

Speaker 1:

In the US, some of the access to jurisdictions where I can bring a civil case may depend on the amount of damage. That is small claims court. So what we could have is an alternative legal system for very small claims where the costs of adjudication are much smaller. That's something approximating Small claims court is something that approximates the idea of having a de minima standard remedy at all, because the fact that I think that the damages are small doesn't mean that the damage is small as perceived by the property owner. And in the American West, if there's no legal remedy to what they see as trespass, there may be violence involving large caliber weapons.

Speaker 1:

I got another letter. Hi, mike. A lot of the AI conversation is somewhat derivative of Terminator or her, but you know what's way cooler than Hollywood movies Transaction costs I have seen these things. The cost of searching for certain experts has basically gone to zero. I use chat GPT in place of a lawyer. I use it in place of an AWS expert. It's wild. The cost of certain low-level knowledge work has basically gone to zero and it's super scalable up and down. I'm a software engineer and we're helping another company. They used to have humans read through LinkedIn job descriptions and, based on some criteria, say yes or no to each of them. Now they feed it all into our AI tool, which spins up about a thousand AIs, does all the reading and then turns them all off.

Speaker 1:

It seems like, if you give this technology a little while to diffuse the downstream effects of transaction cost, will totally restructure markets, firms and society more broadly. Would love to hear you riff on it. Signed AM End of letter. Well, am, I actually don't need to riff on it any more than that. What you've said, I think, is exactly what is going to happen. As we reduce the transactions cost of the rote processing of large amounts of effectively similar text, we are going to get better and better at automating that task. So software is to service jobs as robots and automation are to manufacturing jobs. We will replace more and more of these kinds of service jobs with software, and AI in particular is software that is able to create and learn, and so that is going to accelerate that process.

Speaker 1:

So that's an argument that I made in my 2018 book tomorrow 3.0 and the example that you give. I mean, even though it's kind of trivial, you know we're looking at job applications. We have a thousand of them to look at. If you can automate that and get it down to 200 or 75. That makes just an enormous difference. Now there's going to be type one and type two error. Sometimes I will recommend to look further at people that are not very good and I will recommend to look at no further some people who would have been great. But by and large, that step is going to save us a lot of time and it also means that people who used to work doing that are going to have to find something else. So again, thanks, am, for your letter.

Speaker 1:

It's time for Book of the Week.

Speaker 1:

This week I want to recommend a book by a person who was a graduate student at Duke and was one of my TAs. He has a new book at Oxford University Press. The author is Samuel Bagg, with two Gs B-A-G-G, samuel Bagg and the book is the Dispersion of Power. The book is about the problem of democracy, but it is a kind of a turn or return to an older view of the problems of democracy. Rather than looking at the epistemic properties of democracy that is, democracy as a discovery process, which has been very much in vogue Bagg is looking at democracy as a control process. How can we empower democracy to make the decisions that need to be made while restricting the scope, the domain of democratic choice, to that which actually benefits the public. So, samuel Begg, the Dispersion of Power should be on your reading list. Oxford University Press 2024. Well, the next episode will be released on Tuesday, july 2nd. Well, the next episode will be released on Tuesday, july 2nd. We'll have a new topic, some letters and, of course, a hilarious new twedge. No-transcript.