UHaul Pricing and Free Drinks for Women Nite

by on September 12, 2005 at 7:07 am in Economics | Permalink

Here is my analysis of UHaul pricing and the larger implications for not only ‘women drink free nites’ but many other markets.

Why is it so more expensive to rent a UHaul van to travel from  LA to Las Vegas ($454) than from Vegas to LA ($119) (more here).  Since the direct cost is similar the first thing an economist might think of is price discrimination.  But the rental market is highly competitive, especially when we take into account substitutes such as train, private car etc., so that seems like a non-starter.  A good answer needs to recognize that UHaul operates a network with significant inter-customer externalities.

Let us suppose that as the day dawns UHaul has the optimal number of trucks at each of its locations.  At the end of the day, UHaul would like the same number of trucks at each of its locations.  But this is possible only if departures equal arrivals and to help achieve that balance UHaul lowers the price on the low demand Vegas to LA trip and raises it on the high demand Vegas to LA trip.  (It’s more complicated than this because there are many more than bi-directional considerations but you get the idea.)

Put differently, a customer who travels from Las Vegas to LA reduces the cost to UHaul of running its network because it lets UHaul sell an LA to Las Vegas trip.  The direct costs may be similar but the indirect costs related to running the network are very different. UHaul’s pricing strategy reflects both the direct and indirect costs.

Network economics has some similarities to platform economics.  A bar, for example, is a platform which mediates transactions (pecuniary and non-pecuniary!) between two sorts of customers, men and women.  If men have a higher demand for going to a bar with many women (LA to Las Vegas) than women have of going to a bar with many men (Las Vegas to LA) then in a competitive market the bar must set a higher price for men than for women.  In this context, far from being an example of monopoly power, differential pricing is a result of competition.

More generally, there are many examples of platform markets.  The developer of a mall has as customers shoppers and shops.  A video game console sells itself to players and programmers.  A credit card must have users and merchants.  In some places differential pricing for men and women at nightclubs is illegal.  But in a platform market such differential pricing can make both men and women better off.  Similar things can be said about practices in other platform markets which look anti-competitive at first glance but in fact are the result of competition in the context of a platform.

More on platform economics, also called two-sided markets, in Rochet and Tirole.

Bonus points to Larry White, Mark Weaver and Michael Stack for sending in answers and double bonus points to Larry for suggesting that some of theory could be tested by looking at drink pricing at gay bars.

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