Thursday, October 22, 2009

I hate lines

A friend of mine posted some pictures of his family's trip to a local apple farm. Of interest to me was the line for the apple cider donuts.
I think this line tells you something about the donut makers.

The people in line have both a monetary cost (the price of the donuts) and a non-monetary cost (waiting in line). But the non-monetary cost can’t be captured by the donut makers to help them increase their donut production. That non-monetary cost is paid by the customers, but it produces little benefit for anyone.  It’s just wasted.  If the donut maker were to increase prices (but not too much), the line would still exist but it’d be *much* shorter.  In both cases, a signal is sent to additional consumers: the cost of these donuts is high - you might want to consider skipping the donuts. Both cases turn away customers unwilling to pay the high costs. But in the case of the long line, a large portion of the costs are wasted.

We are tempted to think that in this situation the donut makers are innocent and the line wait is entirely the fault of the customers who are the ones with the high demand.  Conversely, if donut prices were higher, the fault for the high cost would be entirely on the donut maker and not at all on the customer. But both views are wrong.  In both cases, the combined costs (monetary & non-monetary) exist because the producer makes something that the customer demands.  Put another way, the combined costs of the donuts are high because they provide such great value to the customers.

My guess as to why the donut maker doesn’t raise prices is that they don’t want to be viewed as "mean" by their customers. If that’s true, then I’d argue that the donut maker is reacting to customer ignorance and that’s why this wasteful line exists. Average people seem to be very willing to substitute time (which, once spent, can’t ever be recovered) for money (which can be made back in lots of different ways - even in a recession).  And I think it’s a fool’s tradeoff.  Time is unbelievably more valuable than money.  And when the donut makers force their customers to waste time instead of money for the purpose of saving face, I think that’s "meaner" than if they just raised donut prices.

Unfortunately, most people don’t see it that way, and inadvertently waste an unbelievable amount of time waiting in line, being grateful to the producer who doesn’t give them the option of substituting higher priced donuts for waiting in line.

What would be interesting to me is if the donut maker had two lines.  Both lines served the same donuts, but one had higher donut prices.  Then customers could choose which was more valuable to them: time or money.  I think I’d start with the 2nd line being having donuts at much higher prices than the 1st line - maybe 2.5x-3x the price of the 1st line. If that were too high (so that no one bought donuts from that 2nd line) then lower it slightly until people started choosing the higher priced donuts to skip the long wait.

Of course, maybe what this post tells you about me is that I really hate lines.

Update: My friend, the one who went to the apple orchard, and accidentally got me thinking about this  (that's right, John, I said "accidentally") had a comment that made sense to me.  Which, IMHO, he should have posted either as a comment on my blog or a response on  his blog.  Anyway getting on with the update... he said that the two line deal simply could not work. There's no way that anyone would ever go for the idea of the exact same donut for slightly higher prices in the 2nd line.  Which makes me think of Tim Harford and price discrimination.

Harford makes the case in his book (The Undercover Economist) that Starbucks sells lots of different versions of essentially the same thing for widely varying prices. The mocha is just a normal coffee with a tiny bit of inexpensive extra ingredient thrown in to spice up the flavor.  But, he says, the cost of the mocha is quite a bit higher than the cost of the regular coffee. The purpose? To find the maximum price that you're willing to pay. (Read it on line, chapter 2)

Perhaps the donut maker should create a 2nd line for sprinkled donuts. Or donuts with raisins or some such thing so that the customer thinks they're getting more in the 2nd line and would be willing to pay a lot more in profit.  Maybe that would make it palatable to customers to have 2 lines: one long line with cheap donuts and one short line with expensive (but essentially the same) donuts.