Baseball, Dollar Dogs, Apple Pie and Transaction Costs

There always are transaction costs when it is costly to transact , institutions matter and it is costly to transact . I got an interesting letter a while back and I had responded to it on email , but I thought I would take it up , this being baseball and hot dog season . Here's the letter .

My name is HJ and I'm a 17-year-old high school senior taking my first ever economics class this semester . I listened to your podcast with my dad and we both really enjoy it . We're listening to the episode about the $8 hot dogs versus the $1 hot dog and I have a question .

You mentioned that the person selling the $1 hot dogs would set a limit on how many each person could buy , so that one person couldn't come along and buy them all and then start selling them for $5 . My question is why would they want to prevent that ?

If they're making a profit from each of the $1 dogs , wouldn't it be in their best interest to sell all of them from the beginning and then just close down , then the person buying all of them and trying to sell them for $5 or $7 is assuming all the risk . Maybe they can't sell them all . Can you explain what I'm missing ? Thank you Well , thank you , hj .

The thing is , dollar hot dog night at baseball stadiums , especially professional baseball stadiums , is usually to attract people into the stadium . Now suppose I sold all the hot dogs to the first customer who then turned around and sold them to all the other customers for $5 each .

I'm not sure I want someone handling my hot dogs and carrying them around in some old sack , but it would still defeat the purpose , even if that weren't a problem . Is that really dollar hot dog night ? Everybody would be angry because only the first person got the dollar hot dogs . The point is that a ticket and a hot dog and a Coke are a package .

Now , maybe it's a ticket , a hot dog and a beer , maybe it's a ticket nachos and a milkshake , but there are several goods that go together to make up the baseball game experience . The teams are not trying to sell hot dogs . My business as a baseball team is trying to get new people to come to baseball games .

So I have someone who has the concession contract and I let them charge pretty much what they want for hot dogs . But sometimes I will say charge pretty much what they want for hot dogs . But sometimes I will say I would like for you to sell hot dogs for $1 tonight . Now I'll have to pay them something .

I'll have to put that a different set of arrangements into the contract . The point is that on dollar hot dog night there's a discount on the ticket hot dog package . People who don't normally come to games might say , hey , that looks like a coupon , I'll take advantage of the discount .

But if they got there and they weren't the first person that bought thousands of hot dogs and the hot dogs cost $5 , they wouldn't come back . Word gets out they won't come at all . The short version is the mistake is to think of this as selling hot dogs in isolation . But it's the stadium who pays the vendor to discount the hot dogs .

The stadium doesn't want the first person in line to get all the benefit . They want new people to come for the dollar hot dog and then maybe come back next week and pay full price . Notice that the vendors outside the stadium don't have discounts like this .

Only inside the stadium is a way of getting more people to buy tickets , but that only works if every person actually gets a $1 hot dog . So they aren't really selling hot dogs at all . In fact , notice , sometimes they'll give away t-shirts or bobbleheads as an inducement to buy the ticket . So think of the question in that context .

It would be cheaper to give all the bobbleheads to the first person in line and then that person could turn around and sell the bobbleheads to everyone behind them Except . Well , no , you have to have a free bobblehead for each ticket holder . That's the reason that people are buying the tickets in some cases .

Now , hot dogs are a little different because you can buy several and they're a dollar . They're not free . But it's the same principle it's an inducement to buy tickets , not a way to sell hot dogs . Now , I did a little background work on this and found that in May 2024 , a month ago , there was Dollar Hot Dog Night at Metz City Field .

Now there was a sideline reporter , steve Gelbs , who dressed up as a hot dog and did a journalistic report I'm sure he's very proud of in front of the Dollar Wiener Boys , where he explained that the Mets normally sell 4,100 , 4,200 hot dogs per game . For Dollar Hot Dog Night the team had ordered 70,000 frankfurters .

One guy in the stands apparently decided to achieve spiritual oneness on with hot dog night and people started throwing hot dogs at him . So people must have bought six or eight and realize you know these are hot dogs . They came to understand the principle of sharply diminishing marginal returns after you've had four or five hot dogs .

The value of hot dog as a missile goes up . Well , at that Cubs-Mets game at Citi Field in May , the attendance was 22,880 , and there appeared to have been 44,269 hot dogs sold , so almost two hot dogs per person . And since a lot of people didn't buy hot dogs I'm sure think about that there were a few people who bought a lot of hot dogs .

Still , attendance was up slightly and the composition of the fans was probably different . There were people there who were not season ticket holders , maybe hadn't been to a Mets game before , hadn't been for a long time . So it was a way of getting new and different people in the seats .

So when I said before it was like a coupon , coupons are a way of practicing price discrimination . So I don't care about hot dogs and I come to the game . I'll come to the game anyway , but I don't normally come to the game . But I value the ticket .

Hot dog package If you discount the hot dog part , that means that I'll pay full price for the ticket and maybe , having enjoyed the experience , I'll come back and maybe next time pay full price for a hot dog . There's one final thing . The risk transfer explanation may work for some things , such as concert tickets .

If I can sell all the tickets at a lower price , then scalpers will be able to make money if the concert sells out . But if it doesn't , they're left holding nearly worthless tickets .

So I think there is something to your question about when concert venues sell tickets at a price that is less than the market clearing price , knowing that scalpers will buy up all the tickets and then resell them . There is a risk transfer argument there . So in any case , thanks for that letter . Whoa , that sound means it's time for the twedge .

This week's economics joke . An economist did a study . Apple pie cost an average of $3.50 per slice in Jamaica , $2.75 a slice in the Bahamas . There's a little more in some places , such as $4.25 in the Caymans and $4.30 in the Virgin Islands . The economist titled his study Pirates of the Caribbean .

Well , just for fun , I checked for what is the most expensive apple pie in the Caribbean . The most expensive I could find was at Joe's Stone Crabs in Miami . It was $120 for a pie . The pie is eight slices , so that's $15 per slice . Now they do have free shipping , so go nuts folks . There really were pirates once in South Florida .

They used to light fires to look like lighthouses to try to get ships to run aground so that they could salvage the cargo . Now apparently those pirates run hotel catering services and sell apple pies . I got a letter from RAKB . The letter goes like this your recent discussion on corner crossing caught my attention .

In all European jurisdictions I know of , there is a de minimis threshold for legal claims . This means that courts do not remedy minute infractions no fines , damages or injunctions . This contrasts with the case you discussed , where hunters crossed about 4 or 5 inches of private property , leading to an in-depth legal examination .

In such cases , is there a transaction cost argument for implementing a de minimis threshold ?

My initial thought is that a de minimis threshold limits the relative transaction cost for the legal system because more minor infractions that have no significant effect on the property owner's utility are not adjudicated , thereby reducing the administrative burden on the legal system without any significant loss of value to the rights holder .

But a de minimis threshold also fuzzies the limits of property rights , maybe increasing transaction costs under bargaining . If both are true , how do you decide when to apply a de minimis threshold and when not to ? I'd love to hear your thoughts on this . Well thanks , rakb .

The de minimis threshold makes sense if the amount of damages at issue are small , in this case , the right of passage , the right of being able to cross over the corner . It's not clear to me that that is not very much value . Now you might be saying that since there is no damage to the property owners , they shouldn't be able to sue .

But remember , the case in which I tried to argue that the question of damages is more complicated was the Steenberg-Holmes case , the Jacques versus Steenberg-Holmes case , where it was decided that the actual damages were substantial , even though the amount of monetary damage was small . The question is is the principle of property itself something we're going to uphold ?

So I think there's two different issues here . One is the question what is the principle ? And in this case , what was interesting about the corner crossing was that the assignment of rights under a de minimis threshold might make all the difference .

Suppose we say that people have the right to travel across the corner and in fact they have the right to set foot on someone else's property , if they're just crossing and unless they do some kind of damage they can't be sued , that would be very different from saying that they don't have that right and the fact that they would benefit a small amount from being

able to cross over and go hunting means that they could not sue to obtain the right . So basically , this is what I think really should be the Coase theorem . What the Coase theorem really says is that in the presence of transactions costs , the assignment of rights is crucially important . It really matters .

So if it were very difficult to negotiate the right to cross over the corner , whether we assign the right to cross or not , the right to cross for the hunters would make an enormous difference , because then suing would be precluded because we'd be saying , well , it's not really doing a lot of damage to them .

But it is an interesting question and I think the de minimis standard is true in many cases . In the US , some of the access to jurisdictions where I can bring a civil case may depend on the amount of damage . That is small claims court .

So what we could have is an alternative legal system for very small claims where the costs of adjudication are much smaller .

That's something approximating Small claims court is something that approximates the idea of having a de minima standard remedy at all , because the fact that I think that the damages are small doesn't mean that the damage is small as perceived by the property owner .

And in the American West , if there's no legal remedy to what they see as trespass , there may be violence involving large caliber weapons . I got another letter . Hi , mike . A lot of the AI conversation is somewhat derivative of Terminator or her , but you know what's way cooler than Hollywood movies Transaction costs I have seen these things .

The cost of searching for certain experts has basically gone to zero . I use chat GPT in place of a lawyer . I use it in place of an AWS expert . It's wild . The cost of certain low-level knowledge work has basically gone to zero and it's super scalable up and down . I'm a software engineer and we're helping another company .

They used to have humans read through LinkedIn job descriptions and , based on some criteria , say yes or no to each of them . Now they feed it all into our AI tool , which spins up about a thousand AIs , does all the reading and then turns them all off .

It seems like , if you give this technology a little while to diffuse the downstream effects of transaction cost , will totally restructure markets , firms and society more broadly . Would love to hear you riff on it . Signed AM End of letter . Well , am , I actually don't need to riff on it any more than that .

What you've said , I think , is exactly what is going to happen . As we reduce the transactions cost of the rote processing of large amounts of effectively similar text , we are going to get better and better at automating that task . So software is to service jobs as robots and automation are to manufacturing jobs .

We will replace more and more of these kinds of service jobs with software , and AI in particular is software that is able to create and learn , and so that is going to accelerate that process . So that's an argument that I made in my 2018 book tomorrow 3.0 and the example that you give .

I mean , even though it's kind of trivial , you know we're looking at job applications . We have a thousand of them to look at . If you can automate that and get it down to 200 or 75 . That makes just an enormous difference . Now there's going to be type one and type two error .

Sometimes I will recommend to look further at people that are not very good and I will recommend to look at no further some people who would have been great . But by and large , that step is going to save us a lot of time and it also means that people who used to work doing that are going to have to find something else .

So again , thanks , am , for your letter .

It's time for Book of the Week . This week I want to recommend a book by a person who was a graduate student at Duke and was one of my TAs . He has a new book at Oxford University Press . The author is Samuel Bagg , with two Gs B-A-G-G , samuel Bagg and the book is the Dispersion of Power .

The book is about the problem of democracy , but it is a kind of a turn or return to an older view of the problems of democracy . Rather than looking at the epistemic properties of democracy that is , democracy as a discovery process , which has been very much in vogue Bagg is looking at democracy as a control process .

How can we empower democracy to make the decisions that need to be made while restricting the scope , the domain of democratic choice , to that which actually benefits the public . So , samuel Begg , the Dispersion of Power should be on your reading list . Oxford University Press 2024 . Well , the next episode will be released on Tuesday , july 2nd .

Well , the next episode will be released on Tuesday , july 2nd . We'll have a new topic , some letters and , of course , a hilarious new twedge . No-transcript .