A Ramble of Artificial Scarcity
by Ken Arneson
2005-11-10 12:58

Oh, those pesky subatomic particles!

Newtonian physics made perfect sense for centuries. But then all these subatomic particles came along, and started screwing up Newton’s laws. Thankfully, Einstein came along in 1905 to restore order to the chaos with a simple equation.

100 years later, those subatomic particles are at it again. Electrons and photons are now criss-crossing our planet at breathtaking rates over this thing we call the Internet. And again, these troublesome particles are messing with laws of nature that have functioned so well for so long.

This time, they’re not messing up the laws of Newton, they’re messing up the laws of supply and demand.

In physics, as you approach the speed of light, strange things happen. Your mass increases, and time slows down to almost zero.

Time slows down? Really? That’s just plain bizarre.

On the Internet, as the costs of bandwidth starts approaching zero, the cost of distributing data also approaches zero, and the supply of any given piece of data approaches infinity.

Just as Newtonian physics breaks down when a mass approaches the speed of light, the laws of supply and demand start to break down when the supply approaches infinity.

For centuries, supply and demand have worked quite well in regulating and optimizing people’s behavior. But online, it all falls apart.

I just spent several hours yesterday extracting all the referer spam that has cluttered up our server logs. That time is a cost to me. Wouldn’t it make more sense if the manufacturer of this referer spam had to pay that cost?

In the real world, the cost of marketing a product is absorbed by the manufacturer, and passed on to its customers in a sale. Online, costs can be transferred to potential customers, even without a sale.

That’s just as bizarre a concept as time slowing down.

* * *

Of course, traditional businesses hate this development. They’re fully invested in the laws of supply and demand. They don’t understand what to do when it breaks down.

But who does? Where is our new Einstein? Who can make sense of the economics of online business? Where is our E=mc2?

The initial response to this by the business world has been to try to limit supplies by creating artificial scarcities. Go try to download and pay for a copy of Microsoft Office without receiving a physical product. You can’t do it (at least not legally). To this day, Microsoft makes you buy a physical box with physical CDs. There’s no technical reason why this needs to be the case.

The record labels and movie studios are resisting opening up their content to unlimited supplies, as well. ESPN.com is increasingly moving its content behind a paid “insider” firewall.

Creating artificial scarcities are usually frowned upon in free markets, as they are the purview of monopolies. People hate monopolies, and they hate artificial scarcities, as they jack up prices beyond what the traditional laws of supply and demand would dictate. Nobody likes their prices to go up, especially when someone makes them go up on purpose.

There’s a lot of anger directed at Microsoft, at the record labels and movie studios, at ESPN.com, all of whom who have products that can be distributed in almost infinite supply and at almost no cost. But they want to make money. What else can they do? The infinite supply drives prices down to zero. There’s no Einstein around to give them a better equation to use.

The alternative is to embrace the zero price. Reading blogs is free. Open source software is free. But the methods for turning a product that costs nothing into a big business is not very well understood. Many businesses are gravitating toward a tiered approach: provide some services for free, and limit access to others, for a price. Is that the ideal approach?

Nobody knows. We’re all just wandering around here, stumbling in the dark, hoping through trial and error to make just the smallest business work, waiting for some Einstein to come along and turn on the light.

* * *

Which brings us to the Oakland Athletics portion of today’s programming.

It seems the A’s are planning to close off the entire upper deck for the 2006 season. Perhaps only to season tickets, perhaps only for certain games, it’s not clear. But what is clear is this: the A’s want to create an artificial scarcity.

Unless the Yankees, Red Sox, or Giants are in town, the A’s seating supply may just as well be infinite as 50,000+. Just like on the Internet, unlimited supplies drive prices down to almost zero (or $1-$2, in the case of Double Play Wednesdays). Many people stayed away on Monday and Tuesday nights to buy the cheaper tickets on Wednesdays. Creating an artificial scarcity to drive prices back up, making capacity about 35,000 instead of 48,000, is certainly an interesting experiment to try.

That has some people hopping mad, of course. Making people angry is always a consequence of choosing to implement an artificial scarcity.

Lew Wolff has a lot of goodwill with the fans right now, but this move puts that goodwill at risk, if it isn’t handled right.

Handling it right won’t take an Einstein. It ain’t rocket science. The A’s just need to be transparent on this issue, so they don’t come across as just greedy money-grubbers. Transparency == trust.

Lew Wolff should come out and quickly and honestly say something like, “We’re going to try an experiment. We don’t know if it will work, but we think it might. We want to increase advance ticket purchases and increase revenues, so we can keep as many good players as we can. Some of you third-deck denizens won’t like being displaced, of course. We’re sorry about that, and we’ll try to make it up to you somehow, and accomodate you as best we can for your inconvenience. If it doesn’t work, we’ll go back to opening the third deck in 2007. You’ll get first dibs if we do.”

And then see what happens.

Comments: 3
1.   fanerman
2005-11-12 16:38

1.  Lew Wolff seems like a good owner...

2.   Brent is a Dodger Fan
2005-11-14 17:31

2.  Lovely context to the artificial scarcity idea. Of course, this experiment would be their opportunity to test the notion that a new stadium could be even smaller than the now popular "intimate" stadiums that seat 40,000-45,000 fans. That's a story I've read in a local paper.

Witness PacBell -- SBC -- AT&T -- Whatever the bleep you call it -- park. Lots of sellouts, no cheap seats left empty, and therefore no expensive seats left empty, full revenues from the park itself. Compare those to the old revenues from Candlestick -- 3 Com -- Monster -- man, can't they just pick one name? -- Park, which rarely sold out but could accomodate 50+.

Witness, also, reported designs of the Yankees building a stadium in Manhattan -- a 45,000 seat one. Now, for a franchise that averages 50,000 fans a game, is this not lunacy? Well, it would be if they didn't also plan to jack up the prices. Next exhibit:

Boston: 35,000 seats, 97% sold this year, and people still complain that they shouldn't have added seats atop the Green Monster. That's because people like paying $45 a seat to sit in the last row behind 60 rows of other people. Well, that's not exactly true, but it does enable the Red Sox to collect just about every penny of what people are willing to pay for their limited, scarce seats.

Of course, averages don't tell this story. It's the distribution that will matter. The A's averaged 26,000 fans this year, so having only 35,000 seats available doesn't hurt them on an average night. In fact, except, as Ken points out on rare nights, and in sub-sections, a smaller cap on the size of the ballpark may indeed do no harm economically, and may prove to bump some people up from less expensive to more expensive seats.

Only time will tell, and only the A's will know, since I doubt they will publish section by section distribution of ticket sales and capacity management figures, ever. Trade secrets.

3.   Bob Timmermann
2005-11-14 20:18

3.  Ahh, the third deck. I spent much of my year in grad school at UC Berkeley in the third deck of the Coliseum.

I only got to venture into lower levels when I went with my friend who was at Boalt and was an expert ticket scalper. And the time I won four free tickets by chosen for the Chevy Home Run Inning.

I could have won $500 or something, but my batter (Jose Canseco), struck out instead of homering.

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