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Taking Advantage Of The Economic Downturn, Lesson 1…

March 16th, 2009 · 4 Comments
Behavioral Econ · Sports

If there is one thing I am good at, it is taking advantage of opportunities put in front of me…kind of the business equivalent of making lemonade out of lemons. As such, I feel like I should be more supportive of the forthcoming anecdote than I actually am…

I have a friend that works for a certain Boston sports team that I am particularly enamored with. Let’s call them the Purple Gloves (PG) for sake of anonymity. 🙂 He mentioned to me the other day that PG was cutting back on some of its perks for employees, media, etc., citing the economy as the reason for the changes. Most of the changes seemed benign enough- less food for the media people, stuff like that- so it’s not like it’s the end of the world for anyone, but when you start to think through the issue, something doesn’t quite add up.

Demand for PG tickets typically far exceeds supply, so it is doubtful that the organization will lose ticket revenue due to the economy. Televisions are durable goods and I doubt many people cancelled their cable because of the economy, given that cable is a cheap alternative to other forms of entertainment. Granted, people might buy less beer when coming to PG games (though the season hasn’t even started yet) or purchase less merchandise (which is a tricky source of revenue anyway), but no one, including my friend, sees the bottom dropping out of PG’s revenue stream. (Actually, there is probably at least one really pessimistic guy out there somewhere, so please forgive the absolute nature of my statement.) In fact, PG could probably negotiate some good deals with suppliers rather than cancelling the services, since the suppliers are likely scrambling to keep business.

So why is PG doing this now? The likely answer is that it can make cutbacks now and not get the negative publicity and attitudes that it would have to deal with in a more favorable economic climate, since it’s not immediately obvious that PG might not be suffering as much as a lot of other organizations. Economists/Psychologists Daniel Kahneman, Jack Knetsch and Richard Thaler wrote a paper called “Fairness as a Constraint on Profit Seeking” where they surveyed individuals to determine what economic actions by firms were deemed fair and unfair. For example, people generally find it unfair for hardware stores to raise the price of snow shovels when it is snowing outside, even though this is an efficient reaction to the presumed increase in demand for the shovels. (I’d rather pay more for a snow shovel than have them all be sold out before I get there, wouldn’t you?)

In the context of the economic downturn, subjects were asked the following:

Question 9A: A small company employs several workers and has been paying them average wages. There is severe unemployment in the area and the company could easily replace its current employees with good workers at a lower wage. The company has been making money. The owners reduce the current workers’ wages by 5 percent.
Acceptable: 23%
Unfair: 77%

Question 9B: …the company has been losing money. The owners reduce the current workers’ wages by 5 percent.
Acceptable: 68%
Unfair: 32%

Given this perception, it is not surprising that PG would want to make these cuts during a time when they would be perceived as less unfair than they might be otherwise. This is especially true since the notions of fairness aren’t symmetric because of loss aversion– i.e. people aren’t going to notice that much if the perks aren’t all restored when the economy turns back around. Smart, huh?

Tags: Behavioral Econ · Sports

4 responses so far ↓

  • 1 LL Cool A // Mar 17, 2009 at 3:30 pm

    Big sport is also one of the only recession resistant industries. The Economist had an article about that recently.

    Gotta love the BoSox brass for their brass balls.

  • 2 Dan L // Mar 18, 2009 at 3:26 pm

    Sorry to be annoying (as usual), but I couldn’t help but dwell on your comment: “I’d rather pay more for a snow shovel than have them all be sold out before I get there, wouldn’t you?”

    Actually, presumably you’d rather pay less *and* get there before they’re sold out. Maybe you want to say something like, “I’d rather have a higher price and be guaranteed a shovel than have a lower price and deal with the uncertainty.” But of course, it’s more complicated than that. A higher price doesn’t guarantee you a snow shovel at all. It only increases your likelihood of getting one.

    In any case, in the *aggregate*, the snow shovel costumers of a particular store obviously receive more welfare from a lower price. So at most, you are saying that the higher price is better for the store, and possibly for you, Jodi (because of peculiar traits of yours that distinguish you from the general pool of consumers).

    I guess it takes an economist to get price-gouged and respond with gratitude rather than anger. “Five dollars for a bottle of water?! Yay free market!”

    Don’t get me wrong. Suppliers can and should charge whatever they want, and I’m not saying anything about whether the higher snow shovel prices are “fair” or “unfair.” Your statement just struck me as a little strange (as well as irrelevant to the fairness issue).

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