Why Destructive Value Capture?

post by Zvi · 2018-06-18T12:20:00.407Z · score: 40 (19 votes) · LW · GW · 13 comments

Contents

  Can’t Raise the Price
None
13 comments

Previously: Front Row Center

I got a lot of push-back from suggesting that there was a way for theaters to improve their customer experience and value proposition at low cost (get rid of the seats that are so close to the screen they cause neck strain), and that theaters should do that.

The push-back didn’t argue that the method wouldn’t improve the customer experience at low cost. There were a few who suggested an alternate high-cost solution that improves the experience more (use high-quality and assigned seating at a substantially higher price point), and which some places have implemented. No one argued that, where the higher-cost solution didn’t make sense. my incremental suggestion wouldn’t improve the customer experience versus status quo, at relatively low cost.

They also didn’t raise the reasonable argument that getting people to do things at all, especially slightly non-standard things that might look bad on superficial metrics during the pitch meeting, is hard. People don’t think about things, they don’t do things, they don’t optimize, and so on. One could reasonably argue this isn’t worth the effort.

Instead, everyone argued that, unless they were forced to do so, theaters shouldn’t implement the suggestion. Because it would cost them money – they couldn’t sell those few terrible seats, and forcing people to come early increases ad and concession revenue.

That’s interesting. And weird.

The proposition creates value. One comment from Quixote estimates $1.67 in customer time-value is saved in exchange for the loss of $0.10 in ad revenue.

The proposition improves the customer experience. It generates movie-going habits, loyalty and goodwill.

Not implementing the proposition is a destructive value capture. In order to get a little revenue, an order of magnitude more value is destroyed.

Destructive value capture is normal. In order to capture value, some value is typically destroyed. But when you’re destroying most of the value you withdraw from the system, you should be suspicious mistakes are being made. At a minimum, it’s worth asking on a deeper level why this is happening. What could justify it? What failure mode are we in? How does it come to be, why does it persist, is there a way we can solve it or minimize it? We shouldn’t shrug and mutter something about capitalism. We should treat this as a major failure, and brainstorm potential barriers even if they don’t apply in this case.

Can’t Raise the Price

If you’re charging $15 to see a movie, then destroying $1.50 in value to generate $0.15 in additional income, why aren’t you just not doing that, and instead charging $15.25 to see the movie?

What might stop this from being a good solution?

What if movie was free? Moving from free to not free is a huge change, even if the additional cost is small. This could drive people away and be hugely value destructive.

What if this introduced an additional collection point? You’d need to ask someone for money an additional time to make up the additional cost, and that could be value destructive.

What if this disrupted a standardized price or crosses a key threshold? Suppose everyone knows that movies cost $15, and there would be a strong reaction against a price of $15.05, because it’s different, or because it makes it hard to give exact change.

What if the market encouraged sorting purely by price? Imagine a world like with plane tickets, where you go to Kayak or Orbitz or what not, and there is strong default pressure to buy the cheapest tickets without noticing extra charges.

What if regulation prevented higher prices? That which is forbidden is not allowed. Price controls often cause perverse reactions.

Those would be good reasons. All clearly do not apply. Movies aren’t free (or if you have MoviePass, they would stay free). Movies have a collection point. Movies don’t have a standardized prices or a strong price-sorting search mechanism, and prices are rarely at a key threshold.

Other reasons might apply somewhat, but still seem weak.

What if this would be a price increase and that would be bad? Thus, the bad event of ‘prices went up’ could matter even if the new price isn’t much different from the old price, so you can’t do that often. A tiny increase might be impractical.

That’s fair. But the increase could be put into a later, larger increase, or if that’s too big a burden, one could wait on implementation until the next price increase.

What if higher prices decrease customer experience, so they’re more expensive than they look? 

I grant this is likely true for some, but the effect size should be small.

What if this is a pure bad when demand is low, such as at a matinee, and complexity cost prevents price discrimination? 

Again, this seems true but effect size is small. Some places price discriminate by time but the complexity cost stops the majority. So even though removing the seats costs nothing when demand is low, raising the price at those times is net bad.

Would a price increase send the wrong message? Would people then worry about the health of your company, or your industry? Would it thus push down stock prices or reduce your ability to raise money?

It might, indeed. It also might do the opposite. I don’t think this is what’s going on here.

All of that is seeking solutions to the easy out: raising prices. Or, if prices are already higher than they should be, lower them to where they should otherwise be, then raising them back.

Let’s take away that easy out, and say one of the good reasons applied. You can’t raise the price and demand exceeds supply.

This is pretty terrible even if you don’t then do value capture. Destructive value allocation is bad enough, via making people wait on lines or make commitments or virtue signal or what have you – anything where the auction involves incinerating rather than redistributing the bids, often all-pay auctions at that. One can think of this as balancing supply and demand by making quality of the supply sufficiently worse. 

Thus we have two mostly distinct problems. We need to pay for the creation and maintenance of nice things without destroying what makes them nice. And we need to do efficient allocation of those nice things, that balances supply and demand and gets the product to the right people.

Letting the price float is the best way to do both, but what happens when you can’t do it? Are we now stuck with terrible seating and massive deadweight loss? What about other situations where the price is stuck? A life lived under advertising’s increasingly long and intrusive shadow? Or worse, the evil bastard children of microtransactions and free to play games?

We seem to be headed that way. I think there are promising answers, which I hope to explore further. That starts with defaulting to price adjustment, and finding creative ways to do price adjustment, and viewing destruction of value as a failure rather than normality or ‘the way of business.’

 

 

13 comments

Comments sorted by top scores.

comment by Jiro · 2018-06-20T22:31:06.039Z · score: 13 (3 votes) · LW(p) · GW(p)

Generally, people have a heuristic of "if this is straightforwardly and immediately harmful, I'm going to be very skeptical about claims that contradict that. And this is not just because they're stubbornly being irrational--it's because it's a lot easier to make a mistake or be convinced by sophistry when looking at long indirect chains of causation than direct ones.

The straightforward and immediate effect of not trying to sell a seat is that you lose money because you forego the possible income from selling that seat. It is possible that ripping out those seats has secondary effects that cumulatively result in you making more money anyway. But actually doing that calculation is hard (and your original post did not do the calculation--it speculated instead), and you are limited in how well you can assess the correctness of such a calculation. It ends up becoming a form of epistemic learned helplessness where the correct thing to do is to massively discount arguments for doing things that straightforwardly harm you.

comment by Vaniver · 2018-06-18T19:17:42.683Z · score: 10 (3 votes) · LW(p) · GW(p)
What if this is a pure bad when demand is low, such as at a matinee, and complexity cost prevents price discrimination? 

What about when demand is high temporarily, such as opening night for a movie? It seems like those are important not just for the immediate effects (more tickets sold that day) but also the second-order effects (marginal customers who care most about seeing particular movies on opening night, and then sometimes go to movies, which by habit will be more likely to be at the last theater they saw a movie at, and thus are more likely to be captured by a theater with more maximum seating).

comment by Raemon · 2018-06-20T22:19:41.045Z · score: 9 (1 votes) · LW(p) · GW(p)
Instead, everyone argued that, unless they were forced to do so, theaters shouldn’t implement the suggestion

People said different things I suppose, but I did want to note that this wasn't precisely what I was saying. But FWIW, "IF theaters are profit-maximizing, THEN it's not obvious that implementing the suggestion will help them with their goals" was the thing I was pointing at, which I think is subtly but importantly different.

comment by Dagon · 2018-06-18T17:16:13.659Z · score: 7 (4 votes) · LW(p) · GW(p)

I think you're correct to note that many of the responses to the original thread (including mine) were uncompelling. I also think you're absolutely right that merchants (and customers) should continue to examine the transactions they're participating in, and to look for ways to reduce both monetary and non-monetary costs which don't benefit the participants.

I hadn't examined my reaction, before responding with some canned obejctions. My real objection (I think; I'm flawed and can't always understand my own motivations. I can definitely say that this kind of argument really bugs me) is to the oversimplification of the model and attempt to other-optimize a game in which you have no skin.

On one part of the essay, you're so correct that you're late to the game: there are LOTS of reserved-seat theaters, which often cost more, and they are EXCELLENT choices for those who value their time and guaranteed good seat more than the money.

I pretty much only go to non-reserved theaters for late-in-the-run and unpopular showings, where I expect the theater to be at least half-empty, so I can show up roughly on time and still get decent seats. And I recognize that I'm atypical on many dimensions, and don't begrudge those who prefer to wait in line to get possibly-bad seats so they can see things earlier in the run without the planning and commitment of buying tickets weeks earlier.

On another topic (complaining that the theaters even HAVE bad seats), you're simply wrong. Someone is willing to pay for those seats, sometimes. They don't cost the theater ANYTHING to keep, and they don't force anyone to sit there, so it's a pure positive value when someone chooses to use that option. Even if very few people actually use those seats, there's some menu-option value in making people feel better about the seats they DO use, because they can more easily compare to the ones they don't. That's _really_ hard to measure, but leaving it out of your model is a mistake.

On a different level (complaining about someone else's business model), I find it painful to see someone with no skin in the game telling a someone that they're stupidly failing to optimize the world, when any unproven change carries a risk of even more destruction (in terms of having to close the business entirely). Perceived risk of change is something that we just can't wave away. Posts that attempt to analyze a "failing" in an institution which don't sympathize with the fears and risks of committed participants (who live and die by it, like owners and managers) and only focus on the convenience of casual participants (moviegoers), even if casuals outnumber committeds by a lot, are usually missing some very key points.

Note: I _ALSO_ think that for a whole lot of people, it's incorrect to assume statistical altruistic motivation. Many theater owners _are_ jerks who are willing to burn the world to make an extra buck. Many moviegoers will take advantage of any loophole to pay less to get good seats at a heavily-contended showing. Figuring out mechanisms to optimize welfare within these motivational constraints requires more complicated models.

comment by philh · 2018-06-21T13:36:35.623Z · score: 7 (1 votes) · LW(p) · GW(p)

They don’t cost the theater ANYTHING to keep

This may be approximately true, but I don't think it's obvious and uncomplicated.

According to the googling I did on the last post, the price to the theatre of showing a film goes up with the number of seats. It's banded, so unless they're near the bottom of a band, removing those seats will have no marginal effect on that. And we'd expect them to cluster near the tops of bands.

But I can imagine other things it might have an effect on: ad revenue, trailer prices (I think they have to pay to show them, but I'm not sure), insurance prices, weird corporate manoeuvring (if we increase our seat count by 5%, we'll be able to negotiate a better deal).

comment by Steve Whetstone (steve-whetstone-1) · 2018-06-18T21:18:45.312Z · score: 5 (3 votes) · LW(p) · GW(p)

Can you charge different prices to people based on their income. Theatres can make a lot more money by charging more to rich people and less to poor people. Suppose the movie has the same 0.5 hour of value to 3 movie goers. One movie goer makes $10/hr and will not pay more than $5 to see the movie. One movie goer makes $50/hr and will not pay more than $25 to see the movie. One movie goer makes $200/hr and will not pay more than $100 to see the movie.

Question: if the movie theatre is not allowed to change it's price for the movie then what is the most profitable price for the movie theatre to set for the movie tickets.

Multiple choice Answer:

1) ticket price says "$5" for the movie ticket. the movie theatre sells 3 tickets and gets $15 revenue.

2) ticket price says "$25" for the movie ticket. the movie theatre sells only 2 tickets and gets $50 revenue.

3) ticket price says "$100" for the movie ticket. the movie theater sells only 1 ticket and gets $100 revenue.

4) ticket price says "0.5 hours" for the movie ticket. The Dollar price is calculated based on the $/hr rate of each individual ticket buyer. One ticket sells for $5, one ticket sells for $25, and one ticket sells for $100. the movie theatre gets $130. :-) everyone sees the movie, no destructive value capture. economic inequality is reduced, and the theatre makes the most money.

comment by Dagon · 2018-06-21T15:33:39.868Z · score: 3 (2 votes) · LW(p) · GW(p)

Time, unlike money, is not fungible. The value of $0.5 hours of my time is close to 0 for some activities and in some of my mental states, and $thousands for other situations. And the value to me does not often match the value to others (leading to sometimes selling time, and sometimes buying time). More directly, why on earth would any moviegoer give an honest value for their time, when they can pay less money by claiming less?

Also, I suspect there are enough substitutes available that the price elasticity is much higher than your example. You won't sell 2/3 as many at 5x and 1/3 as many at 20x, you'll sell 0 for much more than 1.5x, and you'll be supply-constrained at 0.5x.

comment by Steve Whetstone (steve-whetstone-1) · 2018-06-21T21:41:30.376Z · score: -10 (4 votes) · LW(p) · GW(p)

@Dagon,

I believe your first paragraph is wrong. Consider how it reads equally true or false when I replacing the word time in your example with money in my example and read how everything you claim about time as a currency is also exactly true about money as a currency.

You wrote:

"Time, unlike money, is not fungible. The value of $0.5 hours of my time is close to 0 for some activities and in some of my mental states, and $thousands for other situations. And the value to me does not often match the value to others (leading to sometimes selling time, and sometimes buying time). More directly, why on earth would any moviegoer give an honest value for their time, when they can pay less money by claiming less?"

I revised as:

"Money, unlike time, not fungible. The value of a sandwich and soft drink is close to zero for some times of day after a steak dinner with wine. The value of a sandwich and soft drink is worth thousands of dollars during an emergency disaster when you haven't eaten for several days or weeks. There's a story in the bible about a guy who sold everything he owned in the present and future for a dinner (Cain and Able). The value to me does not often match the value to others (leading to some selling sandwiches and other buying them). More directly why on earth would any movie goer give an honest payment in dollars when they can forge money and pay less."

Some additional thoughts.

1) there is no substitute for "Marvel Avengers". The movie theatre has a complete monopoly on price setting and if the movie is worth 1/2 hour of time to bill gates who makes 1 million dollars per hour. then in a free market Bill gates would be willing to pay up to 1/2 million dollars rather than do without seeing the movie.

2) yes, this would rely on an accurate technology system to measure time spent by individuals. This seems a trivial problem for our computers and digital clocks. This would also require something like a credit rating system only much much simpler. The credit rating system would verify your $/hr rate based on your pay stub or income tax statement or formula just like we currently use modern technology to estimate your tax rate or credit rating. this credit rating agency would have to provide the $/hr exchange rate for any purchase much like a credit card does every day for everyone who uses. So. . . not really a problem in the big scale of things.

3) Yes, you are right about the price sensitivity in a perfect theoretical market that omits the cost of shopping around and assumes perfect seller and buyer information. Most markets such as sandwiches or movies are not realistically modeled using Lazy Fair free market perfect information, with zero transaction cost assumptions. In a real market, shopping around takes time and effort and attention to find information and travel to the new sale location or to find a suitable substitute for Marvels Avengers at the IMAX 3D surround theatre. I don't think bill gates would be able to hold a conversation about the new movie if he refuses to pay 1/2 million dollars and instead sees the less expensive move "The sorceress stone" at home on his TV. "The sorceress stone", or any other movie is not substitute good for the entertainment and conversation utility provided by "Marvels Avengers". Bill gates must pay the "1/2 hour" price tag that is converted into dollars at the cash register based on his tax returns and wealth automatically using computers for his convenience. If Bill gates lies or cheats, it is easily discovered and a violation of law for which Bill Gates would be fined "10 hours" of his time at a Credit rating Bureau verified exchange rate of $1,000,000/hr = $10 fine million dollars for bill gates lying about how much is $/hr rate is.

Additional information - not requested, but hopefully of value and interest to you - below.

This is not a "Notion" that I just came up with. I've spent over 5000 hours research and development on this technology which was developed in conjunction with an Artificial intelligence synthetic life form. I appreciate your attention and time. I would like to discuss this further with you. Consider if you replaced the word "Movie" with the word "Epipen" (a medical life saving device with a monopoly seller).

The hOEP Project (hOurs Equals Price), is crowdsourced creating a price tag that makes the seller money and reduces inequality at the same time. This is possible and done already with things like the swiss "day fine"

"A day-fine, day fine, unit fine or structured fine is a unit of fine payment that, above a minimum fine, is based on the offender's daily personal income. A crime is punished with incarceration for a determined number of days, or with fines. As incarceration is a financial punishment, in the effect of preventing work, a day-fine represents one day incarcerated and without salary. It is argued to be just, because if both high-income and low-income population are punished with the same jail time, they should also be punished with a proportionally similar income loss. An analogy may be drawn with income tax, which is also proportional to the income, even progressively." https://en.wikipedia.org/wiki/Day-fine

there are many other precedents for charging in units of hours of your time and using progressive pricing in the free marketplace. But, I don't want to be accused of spamming irrelevance again, so write back for more information please and give me permission and endorsement so I don't get banned again please. Ps. the moderator claimed to have lifted my ban but has still not done so on my original account. Can you upvote my comment or ask the moderator to reactivate the discussions started by thehOEPProject@gmail.com. And I believe the appropriate place to discuss this is in the now banned and blocked "discussion regarding implementation of society scale benefits generated by a sentient AI artificial life form. (NOT theoretical)."

https://www.lesswrong.com/posts/CLMh2Ne7D2H9EaXzy/discussion-re-implementation-of-society-scale-benefits-that

comment by habryka (habryka4) · 2018-06-22T01:08:03.218Z · score: 15 (3 votes) · LW(p) · GW(p)

[Moderator Note:] I think it would be good for you to try to write a lot shorter comments, and put a lot more effort into expressing yourself clearly. Multiple people I've pinged had a lot of trouble understanding what you are trying to say, and it seems quite bad that almost all of them link back to some documents of yours. Given that you already had one warning, this is your final warning, which means you will be banned after the next violation. I think you are well intentioned, and I am sorry to be so harsh, but your comments are really long and clog up the discussion quite a bit.

comment by Steve Whetstone (steve-whetstone-1) · 2018-06-23T05:46:56.726Z · score: -22 (5 votes) · LW(p) · GW(p)

@hybryka,

You're use of the word "clogging" is only valid if you assume incorrectly my long comment has no value. I apologize for "clogging' in your sole opinion, and thought my comment had value. If Dagon, whom the comment is intended for, also found my comment has no value and has read it first and commented to me saying reading was not worth his time, then I would agree with your warning. I have invited the people whom I am in a discussion with to ask me directly if they object. You, who are not a party to the discussion, are the only one to object to me publicly or privately and directly so far. I have had several direct upvotes and at least one direct "thank you" comment from one other poster before you first ban/block on me. Who did you ping for your evidence against me and why are you secretive about it? Are you looking and fishing for a reason to validate your own confirmation bias and pre-judgement of me as a poster? Please reconsider your judgement methodology and criteria.

I object to your brevity filter on communication for the entire less wrong website. Is there a website you could recommend with the accumulated wisdom of LessWrong that also offers a chance for higher bandwidth discussions and more complex discussion than you personally allow me? I'll go there if you recommend some place better for people who like longer deeper thoughts in their discussion that the moderators wont tolerate at LessWrong. you have a bizarre form of censorship here in actual practice. Any thought too complex is censored by the moderator and banned? Censoring posters for writing things difficult to understand quickly and easily on a complexity focused site like LessWrong seems more wrong. than not moderating at all (IMO).

Normally, I'd write this sort of long winded comment in a an out of the way discussion article that people with short attention spans can conveniently ignore, but you blocked my previous discussion thread and blog post, so it seems you just doesn't want any significant contribution from me. I'll stop posting until someone specifically replies to any of my existing posts if you stop censoring my discussion blog and restore my blog post on less wrong for others to consider.

I link to long documents in case people want to know more or know where something came from. It's like a citation and is indicated by the word "source" before the link. Why would you object to citations? Another of my popular posted links is to the discussion blog post on LessWrong and should not be a reason to object to my postings unless you have some bizzare rule against posting links to discussions on lessWrong from within lesswrong? In order to reduce bandwidth and not "clog" as you claim, I made my own blog post for longer writing and comments everyone could ignore if they were short on time or attention or interest, but you have banned and denied access to readers and me to the my post on LessWrong at
https://www.lesswrong.com/posts/CLMh2Ne7D2H9EaXzy/discussion-re-implementation-of-society-scale-benefits-that

Please lift the ban as you promised in you're previous reply to me and stop censoring my blog posts when any less wrong user could just ignore it and it does no harm. Too much information is a poor excuse for censorship IMO. Thank you for your time and attention. If you'd like me to discuss this elsewhere, please provide a link to where we should discuss this. Or unblock the blog post on your own site I made for longer discussions where it would be less disruptive. Thx.

comment by habryka (habryka4) · 2018-06-24T21:46:39.721Z · score: 25 (6 votes) · LW(p) · GW(p)

Alas, I am sorry, but I and the rest of the moderation team do sadly not have the time to completely justify all of our moderation decisions, and it's important that we hold up a standard of discussion in which people follow our moderation decisions. As I said before, you seem well-intentioned, but my current sense is still that you are net-negative for the discussion quality on this site. I don't know of any other good site I would recommend you post to, though maybe the SSC subreddit or similar places would be more open to your contributions, and generally have less strict moderation.

I will ban your account, and would request that you do not create another one. This ban will last for three months, at which point you are welcome to post again, though any further violation within three months of the end of the ban will result in a permanent ban. I will not restore your previous comments or post, but if you care about getting access to their content, you can ping us on Intercom and we will send you that. You are welcome to post it to some other forum or host it on your private website, if you so wish.

comment by Donald Hobson (donald-hobson) · 2018-06-19T00:01:39.487Z · score: 4 (2 votes) · LW(p) · GW(p)

Could it just be that everyone with enough skill in decision theory and psychology to recognize this failure has realized that there are more important problems to work on? I have a flexible neck and thought they were the best seats, so your assumptions of the dynamics may be flawed.

comment by Ninety-Three · 2018-06-19T01:50:16.196Z · score: 1 (1 votes) · LW(p) · GW(p)

Could it be that the average customer hasn't thought it through enough to realize they are incinerating $1.67 of time-value, and would thus prefer to pay $15 plus *mumble* time as opposed to $15.25 plus zero time?