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Tuesday, April 21, 2015

The Economics of Karaoke (and Other Necessities)

Even sticker shock can reveal something about scarcity

I am a mild-mannered economist by day. But by night, I am a zombie and a karaoke singer (sometimes simultaneously). So, when I travel to events, the other attendees often want to organize a karaoke outing. My recent trip to Philadelphia was no exception. There were two occasions where even I — a professional economist — was flummoxed by the price for a particular service, but on reflection I was glad that the market had made it an option.

The first jolt came when I went to self-park at my hotel in downtown Philadelphia. The weekend rate was around $33 per night (with tax), which was several dollars more than the more prominently posted daily rate (applicable on weekdays).

“It costs me more to park per day than to rent this car,” I grumbled as I went down into the bowels of the property.

A moment later, I realized this was a non sequitur. After all, it would hardly help me if the price for renting the car were higher. I used to live in New York City, so I was used to high parking prices. Really, I should have been thinking, “Man, I’m so lucky that the market economy provides me this virtually new car to drive from Nashville to Philly at less than it costs me to park!”

I actually love parking garages, because they epitomize the market solution to the constraints of the big city. People often think in terms of space (meaning square footage) being expensive in a densely populated city, but more accurately, it’s the area of real estate on the ground that’s so expensive. The market response to the problem of parking is to take the relatively small “footprint” of part of a city block and then (a) dig down and (b) build up. The invisible hand decided to get the cars out of everybody’s way by effectively stacking them in very tall, tightly packed columns.

My other episode with market prices where “this time, it’s personal” occurred the next night, as a group decided to go out for karaoke. It was a Saturday, so of course 18,000 other people in the Philadelphia area had the exact same thought. The problem is that if you have a group of six or more people, at best everybody will get to sing one song if you go to a conventional karaoke bar.

Once again, the market has options for those who are willing to pay extra. In our case, we reserved two hours in a private karaoke room at an Asian restaurant. (I’m not going to say how much I had to pay for this — in case anybody from my group reads this and feels bad — but let’s just say I could’ve rented more than one car for a day at that rate.)

Here, too, when the guy on the phone quoted me the price, I thought it was excessive. But then I reminded myself that we were in a high-traffic area on a Saturday night. We wanted this business to build a (relatively) sound-insulated room equipped to play karaoke songs just for our small group — while people brought us drinks. Truly, Louis XIV would have been blown away by such luxuries, though the book wouldn’t have had any of the songs he would have tried to look up. As it turned out, the market was even more bountiful than I realized when I made the reservation. The unexpectedly high price quote I got on the phone was just the minimum I was guaranteeing for our party. Because our group ordered enough drinks, we actually got the karaoke room itself “for free.”

In this world of finite resources and unlimited human desires, there is scarcity. As in nature, the fact of scarcity creates a tendency for hostility among members of a species, as they compete for the limited goodies available. But unlike the merciless struggle of biological competition, human society enjoys peaceful cooperation through market-based competition. Specifically, humans employ (often imperfectly) the institution of private property, which assigns specific rights of usage and control to particular individuals.

One outgrowth of private property is the emergence of market prices, which merely reflect the terms on which people have exchanged portions of their respective property. Rather than fuming at the “outrageous” price a merchant asks for a good or service, we should always remember that we are expecting the merchant to do something for us — we don’t call them “bads” and “disservices.” It makes sense to complain about taxes, war, and the weather — things over which we have no individual control — but in the market economy, nobody really forces you to pay prices for anything.

I have a friend who worked for a hedge fund when he was younger, and when single ladies at the bar asked him what he did for a living, he would say, “I help move resources to where people can use them the most.” Although this was a strange way of putting things, it was perfectly accurate. Among other ways of viewing market prices, we can interpret them as a communication mechanism. If, say, there aren’t enough parking spaces or individual karaoke rooms in Philadelphia, this information is transmitted to the relevant parties in the form of higher returns to existing parking garages and karaoke bar owners, as they find they can raise their prices and still fill their capacity.

If politicians proposed to block radio transmissions whenever the news was bad, everyone would recognize the futility of such a measure. By the same token, market prices themselves aren’t bad — they are simply messengers conveying underlying facts about scarcity. Market prices need to be free in order to do their job.

  • Robert P. Murphy is senior economist at the Independent Energy Institute, a research assistant professor with the Free Market Institute at Texas Tech University, and a Research Fellow at the Independent Institute.