The Answer Is Transaction Costs

We Get Letters!

August 06, 2024 • Michael Munger

Share episode

Send us a text

What is it that beach parking lots are actually selling? Why do beer bottles cost more than cans? And just what are costs of the thing, as opposed to the costs of selling or buying the thing? Can you really separate them out?

Book o'da'week: Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age Kindle Edition Michael A. Hiltzik, 2009, Harper-Collins.  https://www.amazon.com/Dealers-Lightning-Xerox-PARC-Computer/dp/0887309895

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. We're still at the beach. We'll probably always be at the beach, to be honest. So some beach letters about parking and other important things. A new twedge, a book of the week plus this week's new 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 this week all letters, all the time. There are quite a few interesting ones, so I want to get right to it. But first a reminder If you want to make a comment or ask a question, email the show at tightycemail at gmailcom. That's t-a-i-t-c dot email at gmail dot com. Several letter writers mentioned they had hoped to get a confirmation from the program assistant. Folks, it's just me. I write record, edit, put out the garbage. There's no funding, no source of revenue, just love Well. Letter number one from RA. Good morning Mike.

Speaker 1:

Listening to the podcast over the last three weeks, the subject of beach parking raised a question in my mind. What is the mission of the parking authority of a municipality like Wrightsville Beach, is it to provide parking to beachgoers or is it to regulate the number of vehicles on the island, just limiting the burden of traffic on the municipal street network? As you mentioned, there's always more people wishing to park than there are parking spaces available. Could this indicate that there are perhaps more people wishing to drive to the island than the local street system can handle? Thanks, curious to hear your thoughts. Well, there is an interesting question there. It may be that that's partly to regulate the number of people who come on the island, although it's a pretty inefficient one if you have to come onto the island to find out there's no place to park, because you can only learn that once you've driven onto the island. So it does strike me that if it's well known that there's no place to park and this is we're actually going to come to the Yogi Berra joke about this later on If everybody knows that, everybody knows that there's not enough, then maybe you won't come. But if the only way that they're limiting traffic is to limit parking, then you're going to have a bunch of people driving around not parked. So there probably is some better way to do that. Still, it is an interesting question. What is the mission of the parking authority? What is it they're trying to accomplish? Are they trying to maximize revenue? Are they trying to maximize revenue? Are they trying to get more people to come to the island by charging, maybe, a price that's lower than the maximum revenue maximizing price? It's an interesting question. Thanks for the letter.

Speaker 1:

Second, mike, I'm from Durham, north Carolina, and I'm currently living in exile from my beloved South in Philadelphia. This poor guy had to go to Yankee land. I'm sorry. I've been a huge fan of yours since I was a senior in high school 2015, and my dad subjected me to his favorite episodes of Econ Talk on a road trip back from visiting colleges in DC, many of which were you, not the colleges, the Econ Talks. From that, a fiend for economics and philosophy was born. Recently, I was in Emerald Isle with my family.

Speaker 1:

Whenever I return from the Mid-Atlantic, my first order of the day is to acquire Red Oak, which is a kind of excellent beer. While searching for it, I was confronted with a unique situation. The 12-pack of cans was $1 cheaper than the 12-pack of bottles. The volume of beer is the same. I expect that the answer is transaction costs, but I would love to hear your insight into the specifics of that situation. I expect it has to do with increased storage and transportation costs. Why would any sane person pay for the bottles Best? As. End of letter. Well AS, thanks. I'm sorry to have turned you away from a productive life into being a fiend for economics and philosophy, but as long as you're still able to get red oak, there's some hope for you.

Speaker 1:

There's a number of factors that determine price. One of them is production costs. It's possible that it's slightly more expensive to produce and to transport bottles. Bottles are, after all, heavier. But I doubt that's it. I think it's price discrimination. I think some people like to drink beer out of bottles and some people will drink out of cans, maybe pouring it into a glass or just drinking it straight from the can. It's also a little harder to dispose of bottles, so it's sort of a more niche thing. Does anybody have any idea about this? I would throw this out to listeners. I doubt if it's difference in production costs. It is likely a difference that people who drink beer from bottles are willing to pay slightly more. But it is interesting that there's a price difference. So if anybody has any ideas, let me know. Letter 3. Dear Professor Munger, I recently listened to your episode on parking lots and transaction costs and it reminded me of an effective solution implemented in Bunsen Lake in British Columbia.

Speaker 1:

Bunsen Lake, a popular recreation area, faced significant challenges with its parking systems. Visitors often encountered long lines and uncertainty about finding a parking spot, leading to frustration and inefficient use of time. And uncertainty about finding a parking spot, leading to frustration and inefficient use of time. To address these issues, bc Hydro introduced a parking reservation system that's both innovative and practical. The new system allows visitors to reserve a parking spot online on a first-come, first-served basis, starting at 7 am the day prior to their visit. Here are some key aspects of the system Reduced waiting time the reservation system eliminated the need for visitors to wait in long queues, as they now have a guaranteed parking spot on arrival. Increased certainty Visitors can plan their trips with confidence, knowing that they'll have a parking spot, which enhances their overall experience. Efficient resource allocation the system ensures optimal use of the parking lot, as spaces are allocated based on actual demand rather than first come, first serve. People leaving people coming in it's actually more full more of the time. No in and out privileges the reservation system operates on a no in and out privilege basis, ensuring that once a visitor leaves, their spot is not held for the remainder of the day, thus maximizing the usage of the available parking spaces. This example highlights how transactions cost us, such as time spent waiting and uncertainty, can be mitigated through innovative solutions like online reservations.

Speaker 1:

I believe this case could prove valuable insights, provide valuable insights for your discussions on the podcast. Sincerely S-J-P-E. End of letter. Well, s-j-p-e, I'm a little agnostic about the in and out privileges. It's not clear to me that that maximizes value. You'd have to charge more. I agree, for a spot that had in and out privileges, it sounds like in this instance, there's not anything that's very close.

Speaker 1:

The beach example that is Bunsen Lake is a whole recreational area. They have a lot of different facilities and you would just go there for the day. If you go to the beach, the food opportunities may not be that great. Maybe you want to go back to the hotel and take a shower. In-and-out privileges would be quite a bit more valuable, but I agree that it's an empirical question which of them would produce the most revenue. It might be that when someone leaves and someone else comes in and you have fees that are a substantial part of the daily fee. For example, at the big L-shaped lot here in Wrightsville Beach it's $6 per hour or $30 for the day. So if you had somebody come in for four hours and leave and someone come in for four hours and leave, that would be $48 instead of the $30 day pass. So two different four-hour stints would in fact be more than a day pass. So you are right, it's at least possible, if there's a line, that you would get more revenue by not having in-and-out privileges. The thing and I've said this before when I talked about reservations you could charge more up front per hour or for a day pass that comes with in and out privileges. Still, thanks for the letter.

Speaker 1:

Letter four, your refrain has sunk in like an earworm On the surface, and he's talking about the problem is transaction costs that the answer to every question is transaction costs. On the surface, it seems evidence, as you explain the three T's, that is, triangulation, transfer and trust and other nuances of transacting. Whenever I think about a basic transaction, I wonder if I am missing something or it's a matter of semantics. The Barzell insight and this was long ago one of the first episodes I talked about Joram Barzell's insight that we sell different things in different ways. We sell lettuce by the head, we sell carrots by the pound and we sell diamonds by the carrot. That was a dead joke, I'm sorry, but we sell them by different weights. The measurements that we have differ quite a bit.

Speaker 1:

The AIER article that I had last June and I'll put up a link to that in show notes sows this question. So I understand, says the letter writer, the various transactions costs that layer upon a tangible good or even an intangible service. But what about the core good itself? What about the core service itself? Like the center of a Tootsie Pop. So the question is what is it that's really being sold here? Let's say I want to buy a very simple gold ball the size of a common marble. There are all the layers of transactions from the sell side extraction, processing, purifying, melting, molding, sales, promotion, delivery and of course, from the buy side, researching, verifying travel, safety and so on. What about the intrinsic value of the gold? Does that fit into the sum of the transaction equation? That is the pure element AU. Actually, the previous writer from Philadelphia probably can identify that. That's the way sometimes you'll hear things on the street in Philadelphia hey you, I'll continue or, where it may be a matter of semantics.

Speaker 1:

Back to the letter, is that not to be considered a cost at all, but some sort of core intrinsic value? It is an interesting question to ask what it is that's really being transacted, and I think that's part of what thinking about transactions cost helps you to start to think about is which of these things are actually essential. What would I like If you go to law school the first day in property and contracts class, your professor will pretend to hold up a bundle of sticks saying that this thing that you're buying, it's actually a bundle of rights to use or not use, to sell something, and you can take away or add some sticks and it's still property. So the exact things that are being transacted could be different. So thank you and keep up the good work, hd. End of letter. Well thanks, hd. I don't have much to add to that. It is certainly a very interesting question to think about. What is the good itself and what things go into making up, putting together the good or service, and in fact that was Ronald Coase's fundamental insight in 1937. What the firm does is incur all of the transactions cost of putting together this thing that they then try to sell Whoa. That sound means it's time for the twedge.

Speaker 1:

As I already foreshadowed, I have two Yogi Berra jokes here that have economic content. Now it's not clear that Yogi Berra ever said or did either of these two things, but it's attributed to him. Yogi Berra famously said I didn't do half the things that I did. First joke was somebody asked about a restaurant and Yogi Berra supposedly said oh no, nobody goes there anymore, it's too crowded. That's actually a really deep insight. It sounds funny because obviously people do go there because it's crowded, but nobody goes there. Because it's too crowded, you won't get in, and so what that suggests is a kind of mixed strategy equilibrium. From a game theory perspective you might go there, you won't go there as often as otherwise because the transaction cost of acquiring a table or a parking space are too high. So that's something like the letter from before Nobody goes there anymore because there's not enough parking spaces might in fact be a way to regulate the total number of people on the island, but it would take a while before word got out.

Speaker 1:

But once it was, people understood that there's intentionally not enough parking and it's not clear what enough parking is, because the waiting price interacts with the money price, and so if you're worried about too many people, one thing you could do is have not enough parking. Another thing you could do is charge really high prices, and since not enough parking doesn't benefit anyone, why not just charge higher prices? The answer might be that politically that's not possible. Certainly, every time Wrightsville Beach increases their parking fees, the locals are very unhappy with that. Well, the second joke Yogi Berra was at a pizza place. They bring out the pizza and say how many slices do you want this cut into? Yogi thinks about it for a second and he says you better cut it into six. I don't think I can eat eight slices. Well, obviously it's the same size pizza. But again, there's an interesting and important insight here.

Speaker 1:

Suppose that we were going to play Monopoly. So the Monopoly is that board game where you use dice, you go around and you buy properties. Let's suppose that when you landed on a property, we have an auction, and that is, everybody bids on properties, instead of whoever is landing on the property gets to buy the property for a fixed price, either yes or no. Well, if it worked that way, then a big part of the price of the property would be its value. But one of the things that would determine its value is how much money you have. Now, at the beginning of a monopoly game, there's a certain amount of money that is given out. Suppose that instead you change the rules so that a hundred times that much money was given out. Would that change anything? Well, it would change the prices. It would mean that the prices people would bid for property would go up, maybe by about 100 times, although it's not clear. If people weren't used to it, they might not immediately just multiply by 100.

Speaker 1:

So the fact that the number of slices we can cut a pizza into gives you a fixed value, I think is often missed by people who say what we need to do is give people more money. If all you do is give people more money and the existing amount of stuff to be allocated is the same, that will result in the thing called inflation, because you're not actually increasing the amount of stuff available to be purchased, you're just increasing the amount of money that's going to be chasing after that same amount of stuff. So the joke here, of course and I'm sure you've all heard it is that Yogi said he couldn't eat eight pieces, so it should only be cut into six pieces. That's silly, because it's the same underlying amount of stuff. And yet I know people who will make the argument that what we should do is just give everybody a lot of money and if we do that, the result will be that everybody will be wealthy. Well, it won't be, because it won't necessarily increase the amount of stuff that's available to buy. All it will do is increase price. Well, we have a new letter for this week from DW. Longtime listener, first-time caller DW here.

Speaker 1:

In a recent episode you spoke of the value of beach parking reservations that would allow in and out reservations throughout the day. You wondered aloud if this system exists in the real world. In fact, I encountered just such a system a month ago. Every two years, the band Wilco and their rabid fan base take over the town of North Adams, massachusetts, for a three-day music festival at Mass MoCA, a contemporary art museum. Thousands of fans descend on this small town and overwhelm the infrastructure, including the parking. The days are long, beginning before noon and running past midnight. They're also very hot, with variable weather, including rain. Parking's scarce, with little street parking to speak of. There's a large public lot that's first-come, first-served, that fills up long before the gates open each day. So these festival goers are fully committed to staying all day. Local churches sell access to their lots, which is $40 a day in first-come, first-served, but do not accommodate coming and going. Finally, the interesting part the city of North Adams blocks off a municipal metered lot of maybe 200 spots that right right across the street from the museum.

Speaker 1:

This past year you were able to purchase a spot for $40 a day or $80 for three days. Once you bought your spot, they put your license plate number right on the meter. That was your spot, either for the day or the weekend. You were free to head back to the hotel, freshen up, avoid the long food truck lines, etc. It was an amazing value and I was glad to have gotten one of those spots. They sold out almost immediately, demonstrating they were almost surely underpriced, in no small part due to the ability to come and go. That was what people valued. It'll be interesting to see how they priced those spots in 2026 in light of how well they sold this past year.

Speaker 1:

Thanks for the interesting podcast. It's always a treat when it shows up in my feed. Best DW from New Haven. Well thanks, dw. No, I did not know of that and that's an interesting example, which is what I asked for. What I have to ask what if they auctioned them? So you allow several days for the auction with 200 spots and the top 200 bids get the spot they have to pay. In other words, or it goes to the next bidder if you don't pay within 24 hours. So you'd have to do this weeks before the festival. But the auctioning part of it would be interesting because then I would get a chance to go back and say, well, the top price here is a thousand, but the bottom price is only 90. Maybe I'll go 95. They might bid that up. I'm sure that would increase the revenue for the city quite a bit more. And since this is a fixed number of parking spots, that must be what they're after. It might not be what Wilco is after. Bans worry about other people making a lot of money from selling tickets or merchandise that are overpriced because they want their fans to have access. So I don't know anything about Wilco. Has anyone else done this? I probably know some Wilco fans. I'm not aware of it. It's not something that people actually admit in public.

Speaker 1:

Well, it's time for Book of the Week. This week's book is Dealers of Lightning, xerox, parc and the Dawn of the Computer Age. It's written by Michael Hiltzik, published in 2009, so quite a while ago, 15 years ago by HarperCollins, about the development of the software, particularly the software part of what we now think of the computer communication revolution. So Dealers of Lightning makes for good beach reading or airplane reading. I recommend it. The next episode will be released on Tuesday, august 13th. We'll have a new topic, some letters and, of course, a hilarious new twedge. All that and more next week on Tidy C.