Collusion by Confusion?
Sunday, December 21st, 2008I was in Los Angeles for the first time last week, and, obviously, parking is a major aspect of LA life, given the necessity of cars to get anywhere.
My brother and I parked one day at a little lot catty-corner from his office, and I was amazed at what a wonderful business parking lot ownership must be.
We paid an attendant $7 to drive in and park the car, and that was it. Scores of other cars did the same that day, for varying lengths of time, and the feat had surely been replicated for years before and will be for years to come. All the lot owner has to do is pay the wage of one attendant to sit at the entrance and collect cash. Lot owners must be minting money all over town!
As I was relaying this thought to my brother, Judd, as we walked to the office, he noted that (a) the pricing schemes aren’t as simple as $7/car, since lots do crazy things like charge different amounts at different times of day, for different durations, etc. and (b) that there are many lots and — pun intended — lots of competition.
So, my thought: what if complicated pricing systems are a mechanism to hedge competition’s effect on price?
If two lots were next to each other and charged straight-forwardly — say, $7/car — then price competition would occur. One would charge $6.50, the other would counter with $6, etc., till both suffered.
Unlike, say, Coke and Pepsi, which build powerful brands and add new flavors, etc., to move their competition away from price wars, parking lots can’t do that.
Instead, they can exhaust drivers with nonsensical pricing schemes to distract them from actually comparing lots’ cost-effectiveness. One lot may be cheaper from 2:53 to 3:17, the other from 3:17 to 4:42. Drivers just won’t bother to do the math each time, and they’ll just park wherever their impulses take them — acting on the knowledge that prices are generally in the same range. This way, the lots can keep their prices up; they’re committing collusion by confusion.
It’s counterintuitive because we’d expect one lot to decide to make their prices very simple and straightforward in order to attract drivers — much like phone companies are simplifying their pricing plans (no more allowance of minutes per month: just one low price no matter how much you talk) — which would make other lots do the same.
Simplicity, in other words, would be a dominant strategy, and would lead to a price war. But somehow these lots have achieved a nice (for them) equilibrium of higher prices by making price calculations not worth the effort for Los Angeles drivers (who might not be the brightest, anyway).