Saturday, January 29, 2011

Rent Seeking and Elasticity

The car wash business has been down since the start of the recession with a couple of businesses in Scottsdale providing an example.

The car-wash business in south Scottsdale has slowed to a drip because of the still-sluggish economy, and the possibility of a new one has existing businesses bracing for even fewer customers.

Coy Lindblom, co-owner of the Carwasher, has watched business dwindle at all of his locations, including the $4.00 Car Wash on Indian School Road, west of Miller Road.

"We just kind of live quarter to quarter," he said. "We hope to make it."

Now another car wash wants to start up, and the existing businesses are trying to stop it.

Two owners of existing car washes, Brian Moran of Desert Auto Spa & Car Wash and Praveen Jain of Prestige Car Wash, have asked the council to reject requests for new car washes in the area, saying businesses are struggling to survive...

Meanwhile, owners of existing car washes would like the city to consider the number of washers already in the area struggling to survive before approving new ones.

In economic terms, this is called rent seeking - trying to get the government to limit competition and protect your business.

We can also see how decreasing demand with a fixed supply moves us toward the inelastic portion of the demand curve. In the print edition of the paper, (can't find it online) one owner notes that he has tried lowering prices, but the increased volume doesn't make up for the decreased revenue per customer so his total revenue falls. (The inelastic portion of the demand curve is where a decrease in price results in a decrease in revenue.)

Update: A longer version of the story my be found here, along with the owner's quote:

"Cutting your prices doesn't work because there's diminishing returns. You drop the price to get more volume, but the volume is not close to what you need to make up for the price cut."


Thursday, January 06, 2011

Finding the Equilibrium Price

The BCS National Championship Game will be played in Glendale at the University of Phoenix Stadium on Monday, January 10th. A fixed supply is now meeting an increasing demand resulting in a "soaring" price.

Tickets for Monday's showdown between Auburn and Oregon at University of Phoenix Stadium in Glendale carry a face value of $300 and $325, but fans would be lucky to pay that for any seat.

Advertised prices early this week were in the $4,000 to $5,000 range for premium seats, with some running much higher. StubHub listed two first-row club seats for $15,000 each - a pair equal to a 20 percent down payment on a $150,000 home.

Just like I keep telling my students, if the primary market doesn't find the equilibrium price, the secondary market will.