"There's only one hard and fast rule in running: sometimes you have to run one hard and fast."

Thursday, December 23, 2010

Weirdonomics ("Freakonomics" was taken)

Just what you wanted for Christmas: a lecture on economics from a guy who claims to have no money.

My on-going rant about marathon prices caused two comments that have extremely common misconceptions about economics. Matt assumed that if a marathon had fewer runners, the price would have to go up, as there's an economy of scale. Keith assumed that races are fairly priced, as market competition would drive down costs.

There's no such thing as economy of scale!

If you throw a dinner party for four people, you invite them to your house and make the meal yourself. If you invite 400, you rent a hall and hire a caterer; the cost per person increases and the meal isn't as good. The only time most people have a dinner for a large crowd is a wedding reception and they figure the cost is acceptable, as it's once-in-a-lifetime. Most people who run a marathon consider it as a once-in-a-lifetime thing; those who want to run half a dozen every year have to subsidize them.

Even though the largest breweries produce millions of barrels of beer, one can make one's own more cheaply and it's better quality. Why don't huge breweries then make better beer? They have to deal with overhead, shipping, middlemen and taxes; they can't compete with a homebrewer. So why doesn't everyone just make their own beer and put the breweries out of business? First, there's time and work involved in making one's own and people are willing to pay a small price for effortless instant gratification. Second, most people are so used to bad beer that they find it acceptable or even preferable to homebrew.

There has never been an aconomy of scale in manufacture. In "Das Kapital," Marx went on endlessly about how the mechanization that cut a fraction of a cent from a box of nails created endless miseries for the workers, but he didn't point out that each price-cut also involved a decrease in quality. As long as the nail did it's job adequately, no one cared that it wasn't as good as what they had before. A nail from 200 years ago will last 1000 years, but no one needs one to last that long. The product isn't being made less expensively because it's being made in greater quantity; it's a different product.

Aren't electronics getting cheaper all the time? Most people buy a new phone, television and computer every 3-5 years and they pay more for each of them with each purchase, even adjusting for inflation. The argument is: "My new computer costs twice as much, but does 20 times as much as the old one; an equivalent to the old one would cost next to nothing now." BUT... you can't get an equivalent one! They don't make them! You are, in fact, paying more.

Smaller races cost less per person. Take shirts, for example. The first race in the MDRA Grand Prix is the Meet of the Miles. There's about 150 people, the cost is $5 and there's no shirt - no one expects one. The next race costs $25-33 plus $8 for a shirt, $10 for a technical tee, $15 for a long-sleeved technical tee; there's about 800 finishers (it once had 6000). The first marathon in the series has 5600 finishers, costs $80-100 and one gets a technical tee, plus a cinch bag, an aluminum bottle and, if one finishes, a medal. The bigger the race, the more people expect; the more they expect, the more they have to pay.

Competition does not lower prices!

Imagine that the three marathons closest to you charge $95, $110 and $125 and you decide to start a new, cheaper one. You crunch the numbers and find you could do it at $35 per runner. What would you charge? $90! You'd still be undercutting the others, but maximizing profit. You'd guarantee a profit even if the number of entrants is only a third of what you expect. As the entries start rolling in, you'd start thinking: I could upgrade the shirts... and people like to get a medal when they finish... You end up making exactly the same race for almost the same price.

Does the $125 race drop its price to compete with yours? No. They can't! If they did, everyone who ever did the race would feel they had been ripped off and they'd tell everyone they know about it. Instead, what they do is make an announcement like, "Our race is so popular that others are being created just to take our overflow. If you want to get into our race, be sure to get your entry in early or you might not get in and have to settle for a lesser race."

Then, if your race is a success, you start increasing the price, just because you can.


Glaven Q. Heisenberg said...

I can't argue with these propositions. they're in BOLD. They must be true.

You went from Elitist to Crank in 24 hours!

merry Christmas!

SteveQ said...

If I've learned anything from conservative talk shows (and I doubt I have) it's that you have to SHOUT to be right.

Merry, Christmas, G.

Matt said...

I you were having a wedding reception and rented a room that could hold 400 people, the room would cost the same whether you had 400 people or 300 people. I'm sure costs the same to rent the Metrodome the morning of the marathon whether 3000 people are in there or 8000. There are some fixed costs that are independent of race size, and even those costs that depend on size (t-shirts, for example), cost less as the number ordered increases.

Whether people would be willing to pay those increased costs because it is a special occasion is a different matter entirely.

Matt said...

But, all this to say that if the TC Marathon had 80 people instead of 8000 people, it probably would be much cheaper. I just wouldn't expect all the extras (nice shirts, nice medals, expo, etc.) at the smaller race, and getting rid of that stuff would reduce the cost.

Bill said...

It's interesting to compare the economics of trail racing and ultras with the bursting at the seams Marathons. I hate all the extra crap they give at big road marathons, soooo much waste.
I signed up for Chippewa 50k early, and it was only $25. There's a t-shirt, lots of aid, and probably a free beer at the end. :)
There is also a series of trail race I do in Duluth. They cost $1 per race. A race is really just so we can run with other people right? It really shouldn't cost that much.
Geoff Roes Just wrote a blog on prize money in ultras, as it's a relatively new thing.

sea legs girl said...

Not that I am avoiding talking about economics :), but I owe you a song. It's not necessarily a running song, but I think it's beautiful.

Heart of Chambers by Beach House

But be careful with the rest of their songs, because you start feeling like you are out on a ship and may get nauseated (or at least that's what happened to me :)).

Glaven Q. Heisenberg said...

I actually agree with you re: the alleged economies of scale. Economies of scale exist ... but only if you look at the situation from a narrow perspective, which is what businessmen and economists and all those who perpetuate the myth of Bigger = Greater Economy in general (including the corporate media) do. So, because Wal-Mart orders tube sox in bulk, a pack of 12 costs $1.69; the consumer saves; Wal-Mart saves and sells way more tubes sox than Mom and Pop on Main Street ever could because they're charging 5 times what Mall-Wart charges.

But there you go - proof of the economies of scale, right? Because all we care about is the privatized profit for the corporation and the private, individualized savings for the consumer.

But what about all the associated costs - almost all of which are socialized? In the hellhole maquiladoras along the borders or in the Asian sweatshops to which the manufacturing of those sox is outsourced, precisely because there are no unions, no fair wages, no child labor laws, no environmental laws? All of these costs - which stem directly from government policies favorable to "Free Market-Loving Privatizers" (i.e., shining examples of the Private Sector profiting from Public largesse, or, to put it another way, corporate welfare) - are deliberately ignored in the equation; these costs are all "socialized", because the workers in those countries have to live in the squalor thus generated, drink the fetid, poisonous water the factories they work in produce, die young from the diseases these inequalities cause because they have no health care benefits, etc.

It's truer to say that "Privatization" Zealots are the biggest Socialists of all ... it's just that what they want socialized are all of the costs they generate. The profits? O, yeah, of COURSE you privatize them, you don't share them - that would be communism!

But the costs?

They're all YOURS, little brown and yellow people! Enjoy them all into your early 30s, when you'll die of the diseases you get from this deliberately caused state of affairs.

Next time you hear a Privatization Zealot scream about how the so-called "private" sector is always better, ask him when he intends to privatize the costs of his business along with the profits.

Glaven Q. Heisenberg said...

O, yeah ... and, um, Merry Christmas!

Anonymous said...

Well said. Cheers to Voyageur 50mile. Like a good homebrew. Steve, can you imagine the total costs involved for someone participating in Western States weekend. Can you say a second mortgage!


I think you also have to look at race logistics. When I was race directing I was fortunate enough to get some things done for free that would normally have cost a fee, such as a "trail permit". However the money was donated back to the race anyway. When you have big races you have to deal with more things like porta-potties, which will run you easily 100-200 a pop each. If it is a race in the city you have a crap load of red-tape to deal with, fees regarding ordinances, police security, etc... It's much cheaper and logistically less of a nightmare holding a trail race somewhere in the boonies, or even a race like Whistlestop on a rails to trail versus TCM on city streets. Medals are really expensive and lame, that's why I did photography prints. Shirts are really up to the RD. You can pay anywhere from 4-18$ for shirts depending on fabric, cut, brand, logo size and color schemes.

SteveQ said...

Wynn, I know one race director who gets his cotton shirts for 50 cents and has his own screen printing equipment, so they run $1 each, printed. Of course, they're not shirts people are going to brag about getting...