In late September last year, the UK saw a sight last seen in the 1970s: queues of cars lining up at gas stations all over the country, waiting to stock up on scarce fuel. A series of supply chain disruptions appears to have rendered UK gas stations short of fuel for several days, with the ensuing panic buying, which also caused stockouts during the pandemic lockdown, apparently exacerbating the problem. Many gas stations frequently ran out, and desperate motorists roamed the country looking for stations with some fuel stocks. Eventually the supply disruptions were fixed, panic buying subsided, and the queues disappeared.
It needn’t have been that way. Here’s a radical suggestion: gas stations could have auctioned their scarce fuel. With an app on everyone’s phone, these days creatable and distributable in minutes to the nation, this is now feasible. The drivers who really wanted or needed fuel could have outbid everyone else, and only winning bidders (identifiable by their number plates) would be served at the pump.
That’s insane, you respond: Winners would have had to pay thousands of pounds for a tank of petrol. Yes they would, but that’s only because someone else was almost as desperate as the winners to secure fuel, and so that’s the price. Instead, the fuel went, not to those who wanted or needed the fuel most, but to the people with the most time to sit in a queue of cars, or roam around, burning their precious remaining fuel, looking for alternative sources of supply.
We could go further. Why not also ask people with a full gas tank but no immediate need to drive to sell their fuel back to the gas stations? This measure, combined with at-the-pump auctions, would have forestalled panic buying and released much-needed fuel from those who had no immediate need to those who had. Just because it didn’t happen, and never has had, doesn’t mean it shouldn’t have.
Across the economy, some goods, assets and commodities are sold in a form of auction, with the highest bidder winning, while others are sold at fixed prices. Financial securities have always been sold and resold through some form of auction, together with the majority of goods in primary markets (where the first producer sells to an intermediary, who sells on through to end-users). Occasionally, a product goes from being sold at a fixed price to an auctioned price: the most familiar example is probably airline tickets. Most airlines used to sell tickets at fixed prices, while most now sell at a price which mainly depends on the number of remaining seats on a flight. It was once, but no longer is, possible to speak of the price of a flight from London to New York, for example. Now the price will depend on how many bought seats before you.
One side-effect of this change in airline ticket pricing is the demise of the traditional travel agent. Once, travel-agents bulk-bought airline tickets, way ahead of time, confident of reselling them to their customers later on, often at hefty markups (we customers never knew how much). By auctioning (effectively auctioning, anyway) their tickets direct to the air travellers, airlines cut out these middlemen. With the arrival of the internet, hotels discovered they could do the same, and so a venerable 19th century industry disappeared, its main sources of profits gone.
Economists call this disintermediation and are usually in favour. Unless you owned a travel agency, travel agencies were annoying: to airlines who knew their travellers were willing to pay more than the airlines received, and to travellers who knew airlines were willing to sell for less than travellers were paying. The move to demand-based pricing was accompanied by a move to direct sales, which allowed airlines to pass some of their gains to travellers, making this an easy sell.
More puzzling is why this model is not more universally applied, even in otherwise sophisticated economies. Here are some examples: concert and other event tickets, restaurant tables, car parking bays, train tickets, the ability to drive on motorways, school and university places (even at high fee universities and schools), mobile bandwidth and rent-controlled apartments to name but a few, are sold at fixed prices that often fail to satisfy demand. The results are always the same: either people who would have been willing to pay more miss out, or they buy from an intermediary, or everyone stands on an overcrowded train or sits on an overcrowded motorway, because the price was inefficiently low given demand. The suppliers miss out too, with concert performers making less than they should, and chronically underfunded schools, universities, trains and motorways which could instead be in great shape.
Everyone knows from Economics 101 that when prices are too low (or too high) to satisfy demand, the result is inefficient. What everyone may not have realized is that prices need to equate supply and demand all the time to eliminate such inefficiencies.
Those inefficiencies are not small, and they are often invisible. No one sees, for example, the efficient investment in trains and motorways that doesn’t happen because the pricing model means profits are inefficiently low. But everyone has experienced standing in a queue (sometimes online), waiting to try and secure a scarce ticket. Such an experience is often extremely stressful because allocation to first-in-line is not based on need, willingness-to-pay, or any general notion of fairness, but only on the ability to be first in line. The ability to be first in line usually requires a low cost of time, sharp elbows, and a ruthless attitude to fellow queuers. Most of us have witnessed the moment a queue collapses into an ugly, often dangerous free-for-all. In the developing world it’s an almost daily experience at train stations, for example, at times of high demand.
Objectors usually cite how the poor, or the pregnant, or those in urgent need, miss out when prices rise to clear the market. Such objections persuaded Uber to abandon its excellent but apparently unpopular surge pricing model (I thought it was brilliant). What about the smart but poor kid who wants to go to Harvard but can’t outbid the child of billionaires? These objections miss the point. Sellers like universities want smart but poor kids, and can reserve places or them, as can trains for poorer passengers, sports events for loyal fans and so on. Such customers have to prove need, and must not resell their tickets or places, both easy conditions to enforce these days. Auctions can then be run among these sub-categories of needier customers. None of this is impossible, or even difficult. The same mechanism can even be applied to hospital emergency rooms, where most punters are not, in fact, in immediate danger of life or limb.
But the bigger point is that queuing, the alternative to dynamic pricing or auctioning, doesn’t help those needy folks either. A pregnant woman needing an Uber or a taxi to get to hospital isn’t more likely to get an Uber or a taxi because the price is fixed and the queue is long. Far better to tick a box saying ‘I’m pregnant’ and have to prove it (or else pay the full surge price) and compete with all the other pregnant women in New York who need an Uber, than stand on the street competing with aggressive, non-pregnant people who just want to get home. No form of queuing is any use at all in this regard unless queuing rules are strictly policed and are seen to be so by those in the queue. Even then, if those at the front just resell their tickets or parking bays to the needier people at the back, prices turned out to be market-clearing anyway, it’s just that everyone had a terrible experience trying to transact. I knew plenty of people in Manhattan and Amsterdam who lived in rent-controlled apartments, I just didn’t know anyone who lived in one who was poor and couldn’t have paid a market rent.
The price mechanism is one of the most powerful weapons we have to make life comfortable and cheap. We should apply it far more universally. So, bring on auctions for everything! It will also help control inflation. More about that last point in future columns. And please, start with my local parking bay.