Managing aggregate demand (Part IV)

Amusement parks, crowd control and load-balancing

This is Part IV in this series. In Part I, I opened the with news that Disneyland Paris is getting rid of its Fastpasses in favor of a per-ride, per-person premium to skip the line, and explored the history of Disney themeparks and what they meant to Walt Disney. In Part II, I explored Disneyland’s changing business-model and the pressures that shifted it from selling ticket-books to selling all-you-can-eat passes, and the resulting queuing problems. In Part III, I described how every fix for long lines just made the problem worse, creating complexity that frustrated first-time visitors and turning annual passholders into entitled “passholes.”

Red Queen’s Race

I drove the I-5 corridor between Los Angeles and Anaheim for my first trip to Disneyland, in 1989. The traffic was terrible, an Hieronymus Bosch landscape with Honda Accords and Acura Integras, but the congestion wasn’t just a matter of the number of cars — it was also a function of a major road-widening project.

I was 18 when I took that first trip. I turned 50 last week. They’re still widening the 5. The traffic is still unbelievable.

Here’s the thing: no matter how many lanes they add to the interstate, traffic will still be terrible, for two reasons: first, because adding more capacity induces more people to use the roads, and second, because the wider the road gets, the more living and working space it occupies, and the further apart everything gets, and the more people need to drive to get to where they need to be.

Despite what geometrically illiterate billionaires would have you believe, reality has a well-known bias in favor of public transit. Putting more cars on the road makes cars worse. You can’t solve that with tunnels, nor with self-driving cars. You can’t even solve it by adding bike lanes (bikes substitute for transit journeys, not car trips). Multiply the number of people by the number of miles and divide it by the area of the city and you’ll quickly see that mass transit is literally the only way to clear congestion. Period.

And yet, they keep adding lanes to the 5. It’s as wide as a football field now, and the traffic is worse than ever. It will only get worse, for so long as they keep adding lanes. Relieving traffic by widening highways is like losing weight by eating ice-cream — no matter how many calories you burn by lifting the spoon to your mouth, it will never offset the calories in the ice cream.

There’s a name for a race where you have to run faster and faster just to stay in one place: the Red Queen’s race.

Red Queen’s race as depicted by John Tenniel in Chapter Two of Alice Through the Looking Glass — The Garden of Live Flowers

Stop digging

Red Queen’s races are everywhere. When all you have is a hammer, everything looks like a nail, so whatever it is you’re good at, you’ll do more of. As the saying goes, “When you find yourself at the bottom of a hole, stop digging.”

Disney theme-park capacity management is a prisoner of the Red Queen’s race. The more crowded the park gets, the more people want to come, so Disney builds more rides, which brings in more crowd.

Just like the I-5 that runs to its doorstep, Disneyland’s main congestion-management technique actually increases congestion.

Surge pricing

Back in 2016, Disney introduced surge pricing to its theme-park tickets; since then, ticket prices have been “dynamic,” changing day to day based on anticipated crowds.

At the time, surge pricing was, well, surging. Uber was still viewed as an “innovator” and not a “bezzle” (“the magic interval when a confidence trickster knows he has the money he has appropriated but the victim does not yet understand that he has lost it”). Uber told investors and riders and drivers that surge pricing was an elegant congestion-fighting weapon that sprang directly from the scripture of neoclassical economics. If supply of labor is too low, increase the prices bid for workers’ labor, and workers will leave the sofa, slide behind the wheel and equalize supply and demand.

It was a cute story, but that’s all it was. After all, before the term “surge pricing” was in vogue, there was another, nastier name for the practice: price gouging.

Pure transfer

It’s been a long time since America had a functional antitrust enforcement program (Reagan killed it and every administration since has dug its grave a little deeper), but the last vestige of anti-monopoly law that American enforcers still care about is price-gouging.

The post-Reagan antitrust rule is that “monopoly is fine, so long as it doesn’t make prices go up” (this is called the “consumer welfare” theory). In practice, offenses against “consumer welfare” are hard to prove (when a monopolist raises prices, they blame it on increases in the cost of labor or materials, or some other factor, like Saturn’s transit through Venus). But there’s one kind of price-hike that can unambiguously attributed to market-power: surge prices.

In “The Efficient Queue and the Case Against Dynamic Pricing” (105 Iowa L. Rev. 1759 (2020)), a law and economics scholar from U Kentucky named Ramsi A. Woodcock presents a devastating argument against surge pricing, showing that it necessarily violates antitrust law.

Woodcock’s argument goes like this: when demand for a company’s product or service outstrips the supply, it has two choices. Either it can ask customers to line up and take their chances (queuing) or it can hike prices until enough people have dropped out that supply and demand match up.

Remember, modern antitrust law cares about one thing: “consumer welfare.” The one thing businesses can’t legally use their market power to do is raise prices. Normally, it would be hard to determine what a fair price would be for a good or service, but in the case of surge pricing, we have a clear answer: the pre-surged price. If a toy company charges $14.99 for this year’s hot Christmas gift, then it’s told us what the fair price is: $14.99.

The company produced as many toys as it thought it could sell and set a price based on the profit it believed it needed to stay in business. If the toy is an overnight success and the company raises the price to $30, the extra $15.01 is a “pure transfer” — money that it had implicitly stated that it didn’t need as incentive to produce, taken from the public and sent to its shareholders.

Woodcock considers the traditional economic arguments against this, including Uber’s argument that surge pricing brings more producers into the market to meet demand (this isn’t true: Uber always pockets extra when it does surge pricing, at riders’ and drivers’ expense).

Further, he points out that companies facing surges do everything they can to prevent other companies from entering the market to soak up excess demand, like using trademark, patent and copyright to prevent the production of substitute goods.

Surges are, by definition, transient —once everyone has that popular toy (or once its vogue has passed), we don’t need more production. Production is slow — even if surge pricing incentivizes competitors to enter the market, they’ll arrive too late.

Queuing and touting

Next, Woodcock considering queueing. He points out that economists hate queues, as they are “unproductive” — the people standing in queues aren’t doing something else that they might enjoy more (relaxing with a good book) or that might be more profitable (driving an Uber).

But with the digital age comes a new kind of queue: a virtual queue. With apps and websites, we can join queues in a much more “efficient” way — even if you have to button-mash for a couple minutes to maximize your chance of getting the short-supply item, that’s infinitely more productive than lining up for a week for the new iPhone.

Virtual queues can also be formed well in advance of an item’s launch, which can allow manufacturers to adjust production to meet the demand (as if everyone who wanted the new iPhone got in line so long before the ship date that Apple could actually rent out an extra production line to make sure everyone got one).

But economists don’t just hate queues because they’re inefficient — they also hate them because they tend to create “secondary markets” in which touts spend lavishly to hog the line (say, by paying low-waged workers to wait in line; or by renting cloud servers to hammer the virtual queue server the instant the line opens).

Then the touts re-list the items at huge markups, creating the auction that the original seller forewent in favor of queues. In this version of the economic story, everything always becomes an auction, and the only question is who will receive the surplus: the manufacturer or a tout?

Woodcock admits that this sometimes happens, but he says that so long as some of the items are going to people who stood in the queue because they really wanted them, then there will be higher consumer welfare than if all the items were auctioned off.

Tout-free zone

But that’s not always true. Disney parks don’t have touts, because Disney admissions and Fast Passes are strongly tied to the identity of the purchaser, and transferring them to someone else is a complex process that the company itself oversees. If someone was snapping up all the Disneyland tickets for next Wednesday and then auctioning the off on the darkweb, Disney would know it was happening as soon as the tout submitted 50,000 transfer requests.

This is an interesting contrast with the vertical monopolist Ticketmaster, which has cornered the market on tickets and venues. Ticketmaster operates its own secondary market, nominally a place for you to sell a ticket that you queued up for but don’t need any more.

It turns out that Ticketmaster’s secondary market is actually entirely populated by touts who collude with Ticketmaster to snap up every ticket for every popular show and relist it in an auction. You see, when Ticketmaster sells a ticket the first time, it only shares the small-dollar, face-value income with the performer. When it colludes with touts to sell that ticket again at an inflated auction price, the two conspirators get to split the pure profit without having to give anything to the creative workers whose labor makes the ticket valuable.

So from Woodcock’s perspective, Disney’s virtual queues are practically perfect: they’re efficient, they don’t have a tout problem, and they respect consumer welfare.

But Disney doesn’t use queues for park admission — it uses surge pricing. The queues are only used inside of the parks, to get on the rides. This is a worst-of-all-possible worlds violation of antitrust law that has also steadily eroded the quality of a day at a Disney park, in different ways, for both old hands and new visitors.

Tune in next week for Part V: Expectations management.