The Economics of Priceline

The conventional wisdom debunked.
May 19 2000 9:30 PM

The Economics of Priceline

And what Priceline says about the American economy. 

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The fact that Priceline is good for sellers doesn't make it bad for buyers. After all, the premise of capitalism is that voluntary transactions are good for both sides. But the fact that no one is forced to deal with Priceline doesn't prove that it's good for consumers or for society as a whole.

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  • Some airline seats (and hotel rooms, etc.) that would otherwise go empty are sold to people who otherwise couldn't or didn't care to pay more. A plus for sellers, a plus for buyers, and therefore a plus for society.
  • Some people who would have bought seats through traditional methods buy from Priceline (and its rivals) instead. Most probably pay less as a result, but a few pay more. This is a zero-sum game: The buyers' gain is the sellers' loss. So call it a net plus for buyers, a net minus for sellers, and a wash for society.
  • Everyone who buys through Priceline pays a cost in time, inconvenience, and uncertainty. There is no equivalent gain to sellers. A minus for buyers, a wash for sellers, and a minus for society.
  • Those who don't use Priceline or other discount opportunities almost certainly pay more, since sellers know they're not looking for a bargain. This might be because they're well off. But it could also be because they're short of time, because they don't know lower prices are out there, or because they're unable—say, because they lack an Internet connection—to take advantage. This is a minus for buyers, a plus for sellers, and a wash for society.

Bottom line? Who knows. We can assume it nets out a plus for sellers, or they wouldn't be doing it. As for consumers, it's probably a net plus, but far from the pro-consumer revolution of Priceline propaganda.

One final economic question is raised by Priceline's latest move. If successful price discrimination depends on a lack of competition, how can it possibly work for gasoline? The retail gasoline business features thousands of sellers, often two or three at the same intersection; a homogeneous product (how many people care what brand of gas they get?); and prices are prominently displayed and easy to change. If this isn't a competitive market, you would think, nothing is.

And the answer may be, in fact, that nothing is. A study of Boston-area gas stations by Stanford economist Andrea Shepard found that price discrimination added at least 9 cents a gallon to the average price of full-service gas. In other words, 9 cents of the difference between full-service and self-service has nothing to do with the added cost but is simply a result of people self-selecting themselves for the privilege of paying more. And despite the seemingly competitive nature of the retail gasoline business, this 9-cent premium doesn't get competed away.

So if you can tolerate the hassle, go ahead and give Priceline gasoline a try. But don't think for a moment that you're actually in the driver's seat. 

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