Call me a bad person, but I can’t help but find any financial troubles surrounding the New York Yankees just a little bit humorous. I can only hope, for their sake, that they manage their payroll better than the Bronx Parking Development Co. manages their parking garages. According to various reports, the company that won the contract to operate parking garages around Yankee Stadium is in quite the financial conundrum. My initial thought was that the company is simply suffering from the winner’s curse, since the fact that it put up the best bid for the parking garage contract probably means that it had an overly optimistic view of the revenue stream that it could capture from car-owning Yankees fans. Upon further reflection, it appears as though the company’s optimism stemmed from a lack of understanding of the nature of competition:
The company claims that the lots were, at most, 60 percent full during game days, but those running it also claim that the Gateway Shopping Center has been siphoning off cars for far less.
To park in the stadium lots costs well over $20 a game while Gateway charges under $5. Officials claim that 800 cars per game are taking advantage of the price discrepancy, and thus, the company is raising rates to $35-$45 per car in 2011.
Furthermore, the Metro-North stop has been a hit as well. Bronx Parking executives claim that they are losing money as nearly 4000 fans per game take commuter rail to the stadium instead of their cars.
Oops. See, there’s this little economic concept called substitute goods, and when the price of a substitute decreases (or a substitute becomes available where one previously did not exist), the demand for your product goes down. The fact that there are (or would be as soon as others saw a profit opportunity) other parking and transit options should obviously have been factored in when deciding how much to bid for the contract.
You may have noticed another interesting tidbit in there- it seems like the managers of the parking garages are going with a slight variation of the following business strategy:
Of course, the old “my demand decreased so I’m going to raise my price in order to make up for it” trick. See, that’s not really the way that supply and demand works in a competitive market:
Before we dismiss the strategy as misguided, however, let’s do some analysis. The first thing to notice is that the market for parking near Yankee Stadium isn’t a perfectly competitive market since most of the parking is run by this one company and the garages are closer than the other parking lot, giving them a bit of product differentiation. The parking garage managers face a marginal cost of essentially zero, since once the parking garage is leased or whatever it doesn’t really cost extra to have one more car in it. Therefore, the parking garage should be primarily concerned with maximizing its revenue, since maximizing revenue in this case coincides with maximizing profit.
Clearly, an increase in price is going to lead to fewer cars in the garages, but the relevant question is whether increasing the price of parking leads to an increase or decrease in revenue. Mathematically speaking, it could go either way. For example, if the parking garages were already catering to those people who aren’t very price sensitive and just want to be as close to the stadium as possible, the garage won’t lose many customers as a result of the price increase, and the higher price that it would get from the customers who remain could make the price increase worthwhile. On the other hand, if a whole lot of customers flee, then the price increase is going to lead to lower revenue. In economic terms, the effect of the price increase depends on the price elasticity of demand, and you can see more about the relationship between price changes and revenue here:
This discussion makes it seem like it could be a reasonable idea for the parking garage to raise prices. However, if this is the case then there is an important question left to answer: Why didn’t it set prices higher in the first place if it was profitable to do so? A decrease in demand doesn’t make it more attractive to raise prices (unless of course the demand both decreased and became less elastic, which is unlikely but technically possible), but it certainly does draw managers’ attention to the pricing question. Therefore, there are really just two reasonable possibilities given what we have observed. The first is that the price increase is going to backfire and the garage managers are going to end up an even bigger heap of trouble. The second is that the consumers had been benefiting before from a lower-than-profit-maximizing price. I would like to think I know which of these scenarios is correct, but I really don’t, especially given the reference point that it costs $35-$40 to park near Fenway Park. Here’s an outcome you probably didn’t see coming:
So what’s next then? Ruben Diaz, Jr. wants to create artificial demand for the parking lots by building a hotel in the South Bronx. “We’ve been working diligently to bring a top-flight hotel to the area near Yankee Stadium,” the Bronx Borough President said in February. “As many of you have heard, the Yankee Stadium parking lots are facing severe financial problems, and we believe one of the garages could be used for the hotel development.”
I’m sure luxury hotels in the South Bronx are going to be all the rage, really. At least they’re not trying to artificially reduce the supply of parking in order to prop up prices, but I wouldn’t be surprised if that option ends up on the table as well.
(HT to Megan McArdle.)