How do markets set the profit-maximizing level of air conditioning?

by on May 29, 2008 at 7:05 am in Economics | Permalink

Ben M, a loyal MR reader, asks:

How does an office/shopping mall/theater decide how low to set its air
conditioning? It seems like they’ve found a bizarre and expensive
equilibrium where the "normal" indoor temperature is 63 degrees (in
August) and everyone carries an extra long-sleeve layer to keep warm.
How did it get this way, and is there some way to fix it?

This is perhaps the most common European complaint about visiting the United States, noting that they also don’t like ice in drinks and think freely circulating cold air can kill small babies. 

I believe the goal of high-powered AC is to give customers the feeling of luxury, the feeling that anything can be afforded, and the feeling that the store will spare no expense toward the end of comfort.  I do not believe that either the average or the marginal buyer actually — marketing effects aside — prefers that temperatures be so low.  This implies that low margin stores will set the AC at lower levels; does anyone know if this is true?  For instance businesses offices should be somewhat warmer than Nordstrom or Macy’s.

I find many movie theatres to be infernally cold, perhaps because they seek to be viewed as a respite from the summer heat.  Appealing to dating moviegoers, who may wish to cuddle together, or be forced to do so, may be another reason.

And still I wonder why it is so loud in the pachinko parlors

1 Kevin Miller May 29, 2008 at 6:14 am

What? You’ve never heard of fan deaths: http://en.wikipedia.org/wiki/Fan_death

The article suggests it’s just in Korea, but this “phenomenon” is known in China as well.

2 Johan May 29, 2008 at 6:33 am

My experience in cinemas, shopping malls, etc, is that the emptier they are, the colder they are. So could one explanation to this be that the huge air conditioning units are scaled to handle the “peak” demand for cooling?

3 Blar May 29, 2008 at 7:09 am

Here’s a theory. If you know ahead of time that a restaurant will be too warm for your taste then you might choose not to go, but if you know that it will be too cool then you’ll just bring more clothes. And if you don’t know about the temperature ahead of time, by the time you find out about it in the restaurant you’re already locked in to the purchase. So restaurants are biased towards setting the temperature on the low end of the range of customers’ preferences, since that chases fewer customers away. This implies that the thermostat will be set higher at places like retail stores where you’re free to walk in and walk back out, because in that case a too-cool temperature can drive people away.

4 Chris Lawrence May 29, 2008 at 7:22 am

I think Johan and Blar have hit the answer on the mark; the auditorium may be cold when it’s 10% full, but that’s much easier on the patrons than it being hot when it’s 90% full (in part because it’s easier to warm up than cool down, and in part because 90 hot people = 90 complaints max, while 10 cold people = 10 complaints max).

Plus HVAC systems are relatively slow when it comes to adjusting temperatures, particularly ones that are quiet enough to not disrupt the patrons. You could blast air into the auditorium (or restaurant), but I doubt patrons came to listen to the compressor, fans, and airflow.

5 jonm May 29, 2008 at 8:11 am

Similar to the 10/90 comments, in most places I’ve spent significant time that has AC (i) the system equilibrium shifts drastically due to external humidity and sunlight (ii) there are always ‘hot’ and ‘cold’ parts of the building, specially where the interiors have been repartitioned so the AC/heater layout doesn’t match the new room layout

I think there has to be a business in designing a control system that actually works consistently across conditions and interior locations — think *lots* of cheap micro-sensors distributed around a building, with a computer using a decent model to control things, if only because of the likely savings in energy costs.

In fact the most comfortable building I’ve been was designed to self-circulate and used almost no A/C, but opened and closed vents at foot and ceiling level according to the weather, so you had the luxury of fresh air in moderate weather. I think this was designed somewhere in Scandinavia.

6 Paul Holmes May 29, 2008 at 8:49 am

I just think it’s why in US everyone eats so fast – you’re all in danger of your food getting cold! My wife (American) loves the fact she can take her time over her meal and not worrying about it being stone cold in 3 minutes due to the AC….or maybe it’s just the Vegas factor, keep you awake to gamble (or shop).

7 Floccina May 29, 2008 at 9:13 am

I think that when I read this think freely circulating cold air can kill small babies it was the first time that I laughed out loud reading your blog.

Maybe because others can put a sweater on, control of the air conditioning goes to the person who wants it coldest.

BWT there is evidence that air conditioning contributes to weight gain.

8 Old Greg May 29, 2008 at 9:24 am

Tyler is correct, at least for retail stores. The New York Times did an experiment on this a couple years ago where a reporter visited a selection of Manhattan retail stores and found a strong inverse relationship between the temperature and the prices of the store. Here’s the link for anyone interested:

http://www.nytimes.com/2005/06/26/fashion/sundaystyles/26air.html

9 Spotcash May 29, 2008 at 9:28 am

“infernally cold” ?????

As in colder than hotter than Hades

10 Alex J. May 29, 2008 at 9:47 am

Cold Houses in Warm Climates and Vice Versa David Friedman

Houses in cold climates are kept warmer in winter than those in warm climates, despite the greater cost of heating in colder climates. It is shown that this is not only consistent with but implied by rationality. The contrary intuition is based on a confusion between average and marginal cost. The same analysis implies that it is rational to keep the thermostat setting constant throughout the heating season, rather than changing it with changes in external temperature.

11 Matthew Petersen May 29, 2008 at 10:09 am

Infernally cold? Hmm.

12 David Rotor May 29, 2008 at 10:52 am

I worked on a project advising a national chain of department stores (90 million sq ft of retail space) on cost reduction project back in 1998/99. One of the projects we worked on was to determine if changing a stores temperature had any impact on sales. The answer was that, yes, there seemed to be a correlation, too warm or too cold lowered sales, nothing surprising there, and that the target temperature would be just slightly cool, 68F. What was also interesting was the importance of air circulation into areas with intense lighting, certain areas such as jewellry and clothing sold better with pretty intense warm lighting, but the increased heat load would concurrently lower sales. The net was that they were able to target the right store temperature, the right lighting, and then work on improving air circulation to specific store locations.

My guess as to why you find stores running at 63F would be to manage an inadequate circulation syustem and get close to 68F in the literal hot spots under the warm lights in high margin departmetns.

13 Anonymous May 29, 2008 at 11:47 am

In Boston in the winter it is warm indoors, too warm.
In Birmingham in the summer it is cold indoors, too cold.

These anecdotes may help to describe the state of hospitality in each place. I don’t know why it would be too cold in Boston in the summer, but I have never experienced that (any evidence is appreciated).

Having lived in Berlin last summer, I noticed 3 days where AC would have been nice, but overall it would have been a useless expense. I wore long hiking pants most days, something that is not possible in Fairfax during the summer. I assume that Europe has the correct strategy based on my observation, my model would suggest that AC is more popular where the temperature is above X, Y days out of the year.

In offices, as long as it is men’s fashion to wear wool blend suits, the temperature of 68 indoors seems right to me — summer and winter. I would understand why women in linen dresses which are appropriate for the external temperature of 88 would feel cool indoors, but it doesn’t make sense to me that the people wearing the long wool pants and coat should sweat in order to have the indoor temperature conducive to linen dresses. There seems to be a major mismatch between wardrobe demands between the sexes.

14 Anonymous May 29, 2008 at 11:51 am

…end italics

15 Erik May 29, 2008 at 12:36 pm

Why are movie theaters cold? It’s better for them to be too cold than too hot.

You can always throw on a jacket, but you can only remove so many articles of clothing before you get arrested for public indecency. Better to give people a problem they can fix themselves.

16 NASCAR Wife May 29, 2008 at 12:39 pm

Here is an interesting anecdote: I am a native of Arizona. When I was growing up everyone kept their houses and businesses at 80F in the summer. (When the outdoor temperature is 110, 80 feels cool). In the past 10-15 mean temperatures at businesses has dropped to about 68F. That 10-15 year period coincided with the huge influx of people from other parts of the country who were used to lower mean summer temperatures. So I often wonder how much of the temperature shift here in Arizona is due to people trying to adapt their new hotter environment to be like their old cooler environment.

17 BoscoH May 29, 2008 at 12:44 pm

end emphasis!

I’m surprised nobody has suggested that retail stores might cool things off in order to sell warm clothes. It reminds me of the Hong Kong Phooey episode where the guy makes rain in order to sell umbrellas.

http://www.youtube.com/watch?v=Kon4czfAHu4

18 Richard Green May 29, 2008 at 1:03 pm

To be the only person to carry on from the final comment, the noise level in Pachinko parlours seemed strange from the parlour’s perspective, not so much because it was loud, but that it drowns out the winning jingles from the machines. Poker Machine (slot machine) addicts end up getting a reaction to winning jingles that jumps down the pleasure trains in the brain, making the gambling problem a neuro-chemical addiction. These people make up the greater part of the revenue stream. I can’t see why the client base of the pachinko parlours would be different. Surely exploiting addicition isn’t considered unethical by the yakuza?

19 agm May 29, 2008 at 1:24 pm

HVAC inappropriateness abounds in Houston. Things like buildings so cold inside that the windows are sheeted with condensation. It’s disgusting, but it’s generally not the result of obesity, or of people being from other parts of the country and trying to adapt, or such. It’s because it’s bad engineering, or, to be more generous, engineering that is limited financially to ways that won’t allow local temperature control to be achieved satisfactorily, or to repurposing structures. The largest Starbucks there, when it went to 24 hours, still had HVAC designed to handle a daytime load. Your needs at noon are very quite different from your needs at 3AM.

Also, the thermal mass issue is important. Central air is just a real bitch to distribute properly and still get comfortable temperatures on every floor. Frankly, it generally fails to do so somewhere in every building. Hot floor, cold floor, hot floor, cold floor is a common pattern, I understand.

Also, wool suits (partly as a rant). Stupid stupid stupid in many places. London is not the world center of commerce, and fashion should not be dictated by it’s climate.

20 Noah Yetter May 29, 2008 at 1:32 pm

I believe the peak cooling load story for movie theaters (which do in fact feel comfortable-to-warm when they are full) but not so much for large stores, because in the winter they are too hot. Personally I would prefer stores to be a bit colder than comfortable during the winter months because I’m already wearing a coat, and it is more convenient to continue to wear it rather than carry it.

21 Geoff May 29, 2008 at 3:33 pm

I’m with Erik. People can put on more clothes when they’re cold, but they can’t make the air colder if they’re too warm. So cranking up the AC satisfies everyone the most.

22 aaron May 29, 2008 at 3:52 pm

I believe cooler temperatures allow more, higher brain function.

23 Finja May 29, 2008 at 4:23 pm

…and then you have people like me: my body temperature is constantly around 93°, I weigh about 95lbs and any room temperature below 77° is horrible for me. putting a sweater on doesn’t help either, i actually need outside temperature to keep my body temperature up.

24 ian May 29, 2008 at 7:17 pm

Some cultural observations:
As a kid in tropical Africa in the 50s it was av. 90 degrees, 90% humidity, no A/C, got used to it.
Went to school in England, had wear shorts and sleep with the window open year-round, loved it.
Had to be careful with high school chemistry textbooks – US ones used 72 degrees for room temperature, UK used 68, so I figured the Yanks were pretty soft.
In Australia in 1970 even the business men wore shorts (don’t know if they still do), but very adaptive, and surprisingly natty.
Lived in San Francisco since then, and of course our summers are colder than our winters, or at least feel like it. This is, of course, why we are smarter than those dunderheads in LA and San Diego – our crania are kept at a steady optimum temperature, whilst theirs are being saunified.
Rising energy costs will soon resolve the profligacy of over-heating/cooling.

25 DPirate May 30, 2008 at 8:57 am

I am certain that at least a partial reason for low temperatures in places such as theatres, casinos, malls and auditoriums are to prevent people from falling asleep, and to prevent body odor multiplied by sweating. So, the benefits would include less need for security personnel and preventing greater patron unhappiness due to stench.

Also, it is true that a mammal will raise the temperature incrementally, so this is why the temperature is noticeably lower when there is a dearth of people in a place. Further, even though theoretically an AC system could react swiftly to localised variations in temperature, its not apt to happen in any building meant for the mass of humanity. It would be very expensive to build and maintain, for one thing. I imagine it would be extremely wasteful, as well (heating and cooling constantly).

26 Quoc June 1, 2008 at 3:14 am

Cold indoor shopping malls and retail establishments:

* Chilled people buy more food. Food vendors like to sell more food.

* It’s easier for customers who feel chilled to compensate (with clothing) than for customers who feel overheated to do the opposite. Customers who feel chilled may even buy more clothing– but customers who feel too warm are likely to leave without purchasing clothing.

* Cooling a big space with people milling around in it amounts to a Goldilocks problem. To ensure that no location is too hot (for customers’ or workers’ comfort), the people managing the space may have to overcool some other locations.

* Cold people sweat and stink less.

27 Q June 3, 2008 at 12:27 pm

One more mechanical reason: Grocery stores like to keep things cool inside so that the refrigerators and freezers don’t have to work as hard. Obviously it doesn’t lower overall cooling costs, but does keep the freezer compressor from burning out.

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