Why do some businesses choose scarcity as their business model instead of raising the price to meet the demand?

Question

Here are some examples of what I'm talking about:

• Mass events such as Burning Man, the Olympics, and the World Cup sell out tickets very quickly which forces fans to resort to scalping or using bots if they want to secure a spot
• Concerts of popular artists sell out very quickly which creates a massive scalping market
• Limited editions of clothing suffer from automated bots buying up and reselling almost all of their stock in a matter of seconds
• Popular restaurants sometimes require making a reservation several days in advance or don't take reservations and have everyone wait in line for a long time
• Daycares in Canada and the US frequently have waiting lists of several years which forces parents to sign up for one as soon as they conceive

I'm sure there are more examples of such practices that I'm not aware of. All of them could have addressed the difficulty of obtaining the product through some form of dynamic pricing - as demand goes up you increase the price, as demand goes down you decrease it. Various forms of auctions could also be used to determine the price, if required. This is how the world of airlines operates these days - planes are almost never sold out, but you might find that a ticket costs 10x the original price if you buy one right before departure.

1. What's the name for such business policies in economic theory?
2. Why would a business choose to follow such practices?
3. Can this strategy actually result in higher profits over the long term or are businesses losing money by not using dynamic pricing?

Answer 1

Your question is somewhat ill-posed as stated, because none of your examples are good instances of businesses creating artificial scarcity. Each of them are businesses that face real capacity constraints, whether it be building space and fire-code restrictions or an attempt to manage a sort of tragedy-of-the-commons demeaning of the service.

But you are right in wondering why these businesses don't run their prices up until demand meets capacity. It's basically down to a choice by the business whether to ration through pricing, or ration through queueing.

Queueing is viewed, rightly or wrongly, as a more "fair" means of rationing, since (in the case of non-essential goods) everyone has the same endowment of hours in the day. To the extent that this is true, it's a means to distribute the good or service equitably in a cross-class sense.

It is also a more robust business model in terms of revenue stability, as it leaves much of the "clearing house" work in the respective markets to consumers themselves. One alternative would be to continually monitor the market and adjust prices to keep patronage at or near existing capacity, which is a tricky balancing act that entails potentially high information and menu costs.

Another, obviously, would be to expand the enterprise - but economies of scale must be present. Even then there are associated costs and risks - expansion can serve to dilute a brand, and very few restaurant franchises receive Michelin stars. The market for event space is extremely fraught politically, and the subject of a lot of recent academic interest.

Scalping is an example of arbitrage that takes advantage of the inherent inefficiency of queueing. One can argue that tickets sold in advance of an event must be priced below their value, with the difference being a combination of a risk premium the venue-owner pays to be assured of a full house well in advance and a risk discount that event-goers demand because of the non-zero possibility of their attendance being disrupted at the last minute. Flesh-and-blood scalpers make money off of the rapid market shifts that arise due to the resolving of this uncertainty for both parties, and it could be argued that this leads to a more efficient market.

Of course, software breaks this model entirely, and so I wouldn't make that argument today. But it's certainly true that whatever value scalpers have captured historically was money that even large monopolies like Ticketmaster were not especially inclined to capture for themselves, suggesting that the costs of doing so exceeded the expected benefits.

Answer 2

I think it's more about customer's perception. If they were to raise their prices, they might be perceived as blood-thirsty artists/restaurants/etc. who take advantage of their customers. Instead, by keeping the prices low and having queues outside, it becomes a kind of advertising.

Answer 3

Well, this is a hot topic where I live. Basically most of Central and Northern Europe is suffering from an overheated economy in certain sectors. So, if you want to get a house built or some construction repaired, or have some maintenance done on a gas boiler, you are looking at waiting a long time to get someone in, and you are looking at low quality work in general. I won't mention the equivalent problems in health services because that's more a state-vs-corporate pay struggle.

The problem as I see it is that right now personal TIME is way more important than SAVINGS. People simply prefer to earn less and have more quality life, because their sense of SECURITY in potential earnings precludes the need for SAVINGS. In short, people are lazy and prefer to earn enough and work less, rather than work more and earn in excess.