Sell Me a StoryTwo skyscrapers, built at the same time in the same block. One's much taller. Why?
Posted Thursday, Sept. 6, 2001, at 9:00 PM ET
The curse of thinking like an economist is that you're perpetually baffled by things that everyone else finds completely obvious. Why, for example, is it nearly impossible to get tickets for a hit Broadway show like The Producers? Obviously, it's because that's the show everyone wants to see. But to an economist that's no answer at all. The Producers is not only the most popular show in town, it's also (at $100 for an orchestra seat) the most expensive. Why doesn't the price drive away enough customers so that I can get a ticket?
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StumbleUponAgain, there's an obvious answer: This show is really, really hot. But if it's so hot, why isn't it even more expensive? Surely the producers of The Producers (unlike the producers in The Producers) are not out to avoid making money. If they predictably sell out at $100 a seat, why don't they charge $150 or $200 or whatever it takes to reduce demand down to the theater's capacity?
More generally, why are hit shows consistently underpriced (in the sense that the demand for tickets exceeds the supply) while less popular shows are consistently overpriced? And not just on Broadway, either: At the other end of the theater spectrum, we have the nearly 200 shows in the New York International Fringe Festival, where this year's hit was (predictably) the stage adaptation of the porn classic Debbie Does Dallas, with every performance sold out before the curtain went up on opening night. Meanwhile, dozens of other festival offerings played to half-packed houses. Why didn't it occur to anyone to raise the price for Debbie and lower the price for some of the other shows until attendance evened out?
This kind of thing gets more baffling the more you think about it, and economists spend all their time thinking about this kind of thing. That's why so many of us have that strange, bewildered look in our eyes.
You don't have to be an economist to think like one. Toronto Star reporter Jason Brooks surely carries the gene for economic curiosity. Brooks wrote me last month with a question that's been plaguing me ever since, namely: Why aren't all buildings the same height? Well, OK, I understand why my house is shorter than the Empire State Building. But it's much harder to understand why the Empire State Building is so much taller than anything else in Midtown Manhattan. If it was a good idea to make one building 102 stories high, why wasn't it a good idea to make the neighboring buildings—at least those that were being built around the same time and for the same purpose—102 stories high as well?
Presumably the optimal height of an office building depends on things like land prices, the cost of adding additional stories, and the nature of the rental market. How could that calculation have turned out so differently for one office building than for another being constructed in the same neighborhood in the same year?
Taller buildings cost more per story than shorter buildings. So if Jack plans to put up a 40-story building while Jill plans to put up a 60-story building across the street, here's how they can both get richer: Jack builds 50 stories instead of 40, Jill builds 50 stories instead of 60, and Jill buys the top 10 stories of Jack's building. It's cheaper for Jill to put her top 10 stories on Jack's building than on her own, and they can negotiate a price that lets them share the savings. So why don't they do it? Why doesn't that kind of bargaining cause all buildings to be the same height?
You could try making the same argument with houses: Instead of my three-story house and my neighbor's five-story house, we could have two four-story houses, and my neighbor could own my top floor. Well, that's clearly no good because I don't want strangers—or even acquaintances—traipsing through my house. But in a large office building, you're sharing with hundreds of strangers anyway, so the objection washes away.
It's no use arguing that some builders can't raise enough capital to build more than, say, 40 stories. That only raises the question of why those builders aren't driven out of the market by those who can raise more capital.
I've spent the past month running the building-height question past a bunch of economists, and I've heard a lot of creative theories, but none of them survived much scrutiny. In desperation, I put the question to Michael Raymond Feely, a Boston architect who is actually an expert in the subject at hand. Asking an expert is something economists are generally loath to do, on the grounds that people who spend all their time thinking about, say, architecture, are unlikely to have thought very much about economics. (Try, for example, asking a theatrical manager why tickets for The Producers are not more expensive than they are; my experience tells me you'll get gibberish every time.) But Feely turned out to be more thoughtful than the average expert. He gave me not just one but two responses that actually seem to answer the question.
First of all, it's not always true that you can reduce costs by equalizing building sizes. Here's why: Even though very tall buildings cost more per story than very short buildings, the cost does not increase continuously as you add stories. Instead there are sudden points where going up only one more floor dramatically increases the cost. Some examples are four stories (you can really only go three stories with wood-frame construction), seven stories (kicks in additional requirements for being a high-rise in most jurisdictions), and 15 stories (wind and seismic bracing start to get much more complex around this point). So in between, say, seven and 15 stories, there's no real advantage to equalizing the heights of two buildings; an eight-story building and a 12-story building cost about the same as two 10-story buildings.
Second, some tenants—but not most tenants—are willing to pay a premium for either the exclusivity of a short building or the extra amenities (newsstands, restaurants, health clubs, observatories, and prestige) of a tall building. Therefore it can be profitable to put up a few of those unusually sized buildings, even if their heights fail to minimize construction costs.
And there you have it. Hats off to Mr. Feely, thanks to whom I can sleep again at night—just as soon as I figure out this whole ticket-pricing thing.
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Reader Comments From The Fray:
[Notes from the Fray Editor: Ben Kirkup says "abandon statics" and "how about sticky prices?" Arthur Stock added to his post below with a splendid theory on the economic utility of using The Fray: read it here.]
The reason no other building is as high as the Empire State Building in the same neighborhood is that in fact it was a bad idea. The Empire State Building lost money for decades because it was not in the same neighborhood as the other high buildings. It is a tribute to good architecture trumping very bad economics.
--John H
(To reply, click here.)
You can get a pretty graphic demonstration of the building height issue by flying into New York from the south. Most of the routes into La Guardia Airport (when they let you land there) give you a great look at Manhattan. You really can see how the building height varies. It's especially interesting that it starts high in the south, gets lower through Soho and the Village, gets taller again and then gets lower as you get into Harlem.
Let me offer a few considerations that may affect this issue:
(1) Zoning. Zoning trumps economics. Most zoning is designed to create districts with varying uses and, typically, varying heights. In some cities, there are different rules for each block. There often also are provisions that allow trade-offs when you can't use the otherwise allowed height, which makes the heights non-uniform even in areas where they could be. For instance, the air rights for Grand Central Terminal were sold off and used to make other buildings in the vicinity taller than they could have been.
(2) Neighborhood economics. Fifth Avenue in the 40s and 50s can support very tall buildings because it's a desirable place to be--close to transit, nice neighbors, etc. The same cannot be said of Harlem (although it's getting better) or the Lower East Side. What you'll spend to build is largely dependent on what you think you'll get for the building. As a general rule, buildings in a city get smaller as you move away from the centers of economic activity.
(3) Construction conditions. There can be variations in how expensive it is to build from one side of the street to the next. The World Trade Center in Manhattan actually required development of brand new construction techniques because that part of Manhattan is built on fill.
(4) Who owns the building. The World Trade Center was built by the Port Authority of New York and New Jersey, which had access to low-cost capital that essentially was unavailable to commercial developers. Also, a building that will be owned by its primary tenant tends to be built to meet the owner's needs, which may make it larger or smaller than a comparable rental-only building.
--Randy Khan
(To reply, click here.)
[David Margolies read this, and expanded on 3): "Here is another reason: geology. The clusters of tall buildings occur where the underlying bedrock is quite close to the surface."]
Many people go to the theatre on the recommendation of other people they know. Most people know people in their own economic class. If you charge $200 per ticket early in the run, people in the $100 ticket economic class will not know anyone who saw the show, and will not advance order tickets. By contrast, let people in the $100 class in early, and they will tell their friends, who will order many more tickets, the $100 class being much larger thatn the $200 class. So selling tickets for $100 early in the run, even when you can fill the house at $200, will increase advance sales over a longer time period. Advance sales are a good thing, since the theatre gets the time value of the money.
Why not charge $200 very early, then cut the price? This is done to some degree, but if large price decreases are anticipated, fewer will buy the highest price seats, even if they can afford them, since they can wait a short period to save money.
The real reason that some shows sell out, though, is that the expense of making a precise determination of exactly what the market will bear on any given date is greater than the added revenue gained by charging the optimal price.
--Arthur Stock
(To reply, click here.)
(9/6)