Chuck E. Cheese’s: Where a Kid Can Learn Price Theory | Freakonomics

We ask: what’s price got to do with it?

CORROY: I mean, I think it certainly could be.

And we hear Steve Levitt’s brilliant idea for testing this theory:

LEVITT: Maybe I could dress up as a child, you could be the adult. And then we can see how many other parents, if I monopolize a game, end up attempting to beat you into a pulp.

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DUBNER: Levitt, I’ve often heard you say that the one thing that economists are reliably good at doing is setting the appropriate price of a good or service. Can you explain briefly in your economist-speak how you do that?

LEVITT: So essentially the art of setting prices is simply figuring out what price to set so that you have the marginal cost of providing that good equal to the marginal revenue generated by the sale of that good.

DUBNER: So the danger of setting a price too high if you’re selling would seem to be obvious, right? People don’t buy what you’re selling. But what’s the danger of setting a price too low?

LEVITT: The danger of setting a price too low of course is that too many people want to consume the good. If it’s a kind of good where someone takes it and walks out of the store, then you’ll find that the shelves are empty. In the case where it’s not something we actually take out of the store but instead something you experience then what you end up having are long lines of people, all of whom want access to that same good but only a few of whom can actually consume the good.

We’ve talked a lot on this program about how price affects behavior. For instance, one of the most effective tools to cut smoking? Price and tax hikes:

Kenneth WARNER: What we know is that if you increase the price by 10% you will decrease total cigarette consumption by 3 to 4%.

But what about when prices fall? The price of food has generally fallen over the past few decades – which makes it easier for people to eat too much. When the price of gasoline drops, people tend to drive more, which leads to more congestion, pollution, and crashes. If you own a bar and you suddenly drop the price of all beverages from five dollars to five cents – how do you think that’s going to work out? So the relationship between price and behavior, especially bad behavior, can be pretty strong. And that’s what led one Freakonomics Radio listener to put two and two together and come up with a theory.

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