53: Why Are Weddings So Expensive? Blame Econ 101.

in New York. Dan Scott couldn't join us this week, so instead I'm joined by a guest host, Brian Shapada, a government bonds reporter here in New York as well. Brian, thanks for joining us. Thanks for having mckate So. Brian is has been very busy for the past couple of weeks because he is planning a wedding for a few saturdays from now right in addition to the crazy times and treasuries and watching the Fed. Yes, planning our wedding

for about three and a half weeks from now. And how long have you been planning that wedding for a little over a year and are you excited to see the planning come to an I'm psyched it's all coming together. It's going to also, of course excited to be married. Yes, of course. Well, Brian is actually the perfect co host for this week's episode, because all we're talking about our weddings.

I spoke to David Wood, he's the president of the Association of Bridal Consultants, and according to him, sorry, Brian, you're not that unique. Almost two and a half million couples get married every single year in the United States, and the average cost of those weddings is a little shy of thirty thou dollars, and so he estimates that it's actually an eighty billion dollar industry. And that's that's

just ho. But Brian, I'm sure after your plus of planning your own wedding, you're well aware of how expensive these celebrations are. This is no news to you. Yes, I am acutely aware of that. Um. A lot of the reasons why weddings are so expensive, though, can sort of really be explained by some of the economic theory that I and I'm sure a lot of the people listening to this podcast learned in their freshman year economics classes.

You have a range of textbook terms, price discrimination, supplied demand and elasticity of demand, price in sensitivity, all this stuff. And before you go any further, um, you know, for some of those listeners who maybe a year or ten outside of their college econ classes, we have a really special guest to help us figure this all out. Austin

Goolsby is here with us. He's a former White House economic advisor to President Obama and since he's been a strategic partner at thirty two Advisors, leading their economic intelligence practice. He's talking to us from Chicago, where he's also an economics professor at the University of Chicago's Booth School of Business. Austin, thanks so much for joining us. Yeah, thank you for having me, of course, And so in addition to all of Austin's very impressive accolades, he he's also a happily

married man. Congratulations, thank you. So he was married and I read a little bit about this, but tell us kind of how you learn firsthand some price discrimination and ECON things at work when you're planning your own wedding. Well, as anybody who's gotten married knows, planning your wedding as a nightmare, and it's only gotten you know, I've been married a long time. It was a nightmare then, it's

only a bigger nightmare now. And uh so we were, you know, we were a little older, so we both had my wife and I both had jobs, so we were doing it on our on our own. Here. We we had moved to Chicago, my wife from New Jersey. So we're having the wedding here, and you know, there's a hundred things you gotta figure out, and the chairs and then do you want the cups to be taller and shorter and what? And this just a thousand decisions. We finally find the place, and it's a place the

Chicago Cultural Centers downtown. It used to be the public Library. Is a really nice uh it's a really nice big room and it's got a dome and it and entile in this but it's run by the city, so it's not it's not integrated. It doesn't come with food or whatever. You have to arranged to have somebody coming to bring the food and bring the chairs and bring the table. So I'm talking to the food people and I say, you know, there's gonna be whatever people there, and we're

gonna have these tables. We're gonna have a band and they're like, yes, yes, And so we come to the end and I said, uh, I said, how much is that gonna be? And I can't remember what the orders of man to do are, but let's say they said, you know, but that'll be seventy dollars a person. I'm like, god, seventy dollars a person. I say, okay, and where you know,

can we have the ceremony or you know. I said something about the ceremony and the guy says, whoa, whoa, wait a minute, this is a wedding And I said yes. He's like, oh, that is a hundred forty a person. I was like, what why But it's the same We're in the same place. And he and that, the caterer said, And I love it that that he said it that way. He was like, well, people are willing to pay a

lot more if it's a wedding. He was He wasn't even making he wasn't even pretending that there was some other thing like oh, it's more costly and we have to make the food better. He basically just said, um, exactly what Brian said. People's willingness to pay is higher. They don't want it to be best up. You know whatever, Um, we're gonna we can get away with charging morph it's a wedding, while Austin, that sounds like a really clear

textbook case of price discrimination totally. I was teaching micro at the time, and so I'm teaching price discrimination. But you were teaching microeconomics at the time that you had to deal with price discrimination. Yes, And in fact, the I was I had to teach on the weekend, and I had to teach the morning of my wedding. And there's this photo of me standing there in a tuxedo teaching class. I finished the class, I go down and

I and I get married. And the day of that class was the monopoly markup formula for anybody who's who was into micro which is basically the center of all price discrimination, it says, here's the formula you use once you know how sensitive the customer is, here's how you jack up the price on them, which is virtually exactly

what happened to you. Yep, that's just incredible, I mean, and I think that's what kind of Brian and I what we were so attracted to you about this show is because so many things that happen in weddings can be explained by these I mean econ one oh one series and principles like price discrimination like what you're talking about. But I think what's really interesting in Brian like kind of talking. I mean, it's not that way in all markets.

It's and weddings are unique, right, I think there's definitely an information gap between the buyers and sellers of various uh, you know, wedding needs. Um you've got like flowers for example. I mean, the people who are selling you flowers certainly know the prices and certainly know how available the supply of flowers is. And you, as a seller, you're coming in and you're buying you know, thousands of dollars worth of flowers for the first time to populate your venue,

and you just don't know how much each costs. And you can't go item by item and comparison shop in any sort of timely manner in Austin. Help us out here, help us bridge the gaps. So typically post Internet, we've been dealing with mostly transparent markets. I'm thinking of like the airlines and now you have Kayak, you have orbits. I mean, and even for you know, market markets, so I mean fixed income our own company, Bloomberg pretty much created the transparency to that market, but it's not the

same way in weddings. Can you kind of help us frame how important transparency is for efficient markets? Well, I guess I would walk it through in a couple of ways. With any brice discrimination, what information you have about the customers and their willingness to pay is one huge element. And the second is you have to have the ability to prevent people from arbitraging or reselling the thing somewhere else.

So if I can go buy a million tickets to the movies at the student discounted price and then just turn around and resell them to non students, you you won't be able to get away with price discrimination. I think part of what happens with transparency online is you've got multiple sellers. Once you get into transparent market, everybody's trying to undercut each other to steal the business. If you live so my parents live in Abilene, Texas, they're

retired there. There's only one carrier that flies to Abilene, Texas. It's American Airlines. So you can have kayak, you can have orbits, you can have whatever you want. The fact is, when you're flying to Abilene, you're gonna pay because American Airlines they can be transparent, but they can charge you a lot because they know if you're flying to Abilene,

you're not really going to have that many substitutes. The substitute is get off in Dallas and go rent a car and drive for four hours to get to my parents. That happens with weddings. Okay, so Brian's right. They know more about the flowers, they know more about what's rare. They've got a package deal of a whole bunch of things, and you can't find one. You can't separate out how much are the ballroom chairs versus the folding chairs versus

the whatever. I mean, I guess you can. But there's just a hundred things that you would pay money to just not have the decide. And then you get the third, which is whether it's because of the scale, whether it's because there's only a limited number of vendors who want to deal with the pressure of a wedding. But it's hard to get a lot of competition. It's hard to

induce an auction for wedding photographers. There is no kayak available of I'm going to go on here and figure out if somebody will somebody will bring in the alcohol separate from the food at a lower price. They lists largely don't do that. And I think the bigger question is why isn't there more entry into what seems like very profitable economics of these wedding businesses. How how are they not How are people not falling over themselves trying

to drive the prices down to more competitive levels. And I don't really know the answer to that. Well, maybe I can help you out because I was speaking to the president of kind of the Trade, the leading trade organization for wedding vendors, David Wood, and he was telling me that a lot of the reason why that happens because the market is so fragmented and is so decidedly local. So, for example, for flowers, you're probably going to be going with a local forest because you can't ship in flowers

from somewhere else. Right, locality is very important, and same with venues, right like their mother very nature, they can only be in in certain places. He was saying that because because of the kind of fragmented and highly local nature of the market, it's hard to kind of even though it is right for disruption and I am so sorry I just use that word. But even though it is, it hasn't been able to happen because of that. But I think the other thing I mean, Brian, I mean,

tell me about Emily's preferences. How, I mean, how strong have her preference has been, because that's the other aspect, like if you want something, you want something and you don't care how much it costs. So Brian, kind of how what's your experience been with that, not just her preferences, my preferences to it's your both day, not just heard it. Well, I think it's really interesting. That's what Austin brings up about sort of being able to resell movie tickets or

whether it's a kayak for wedding photographers. It's just it just does not seem feasible because it's so intensely personal. Um, you can't just go online and figure out how comfortable you are in front of your photographer or your videographer. You want to meet with them, you want to speak with them, you want to hear their experiences, and you want to feel like if they reflect what you want

to get out of the day. So I think it's really tough and I'm I'm just wondering maybe Austin you can talk a little bit about how how strong preferences and having having that on on the bye side um affects, uh, you know, price and insensitivity and how they're able to

market prices. From a ventor point of view, I think it does matter, and sort of the one way to think of it is there are some products like like sushi, like brain surgery and others which just the fact that somebody comes in and says, well, i'll give you the same thing for half price does not induce a whole bunch of demand to switch to them, you know, the half price sushi, half price brain certain you're thinking like whoa wait a minute, The quality makes a big difference.

And I do think some element of that that that's correlated with what how strong are people's preferences, and that has a strong bearing in weddings because if you if you I don't know, I don't know your wife, you know, but if you go to say, hey, honey, great, great news. I've got a florist who says that they're willing to do everything you said you wanted in flowers, but for one third the price, and they're gonna bring the flowers

over here from West Virginia. You know we're gonna we're gonna bring it in from a market that's a lot cheaper. There are gonna be people who say, who say, in your family, this may be remembered as the Brian incident, and you may hear about that for the next forty years. That that's a great way actually, And it's I think it's interesting you bring up the medical thing too, and like you know, half off isn't always great. I mean, that's I mean, that's a huge thing. There's a lot.

I mean, there's an economic principle. It's the names escaping me right now. But the idea is the more something costs, the more you want it. What is the superior versus inferior goods? Well, it sounds like signaling, you know, we we've got a thing of of any any time when there's not just uniform products, let's let's call it that way.

They're not just homogeneous. There are quality lad there's there's both what the economists called horizontal differentiation of slightly all the goods are slightly different from each other, but also vertical some of them are just better than others. And we can all agree. Let's say that you know, the burritos at Chipotle are better than a taco bell that

are better than a del Taco you know whatever. If you have some ordering of quality, um, and people have a taste for quality, then it's gonna make the normal rules of the market. It's not that they don't apply,

it's just that they get more complicated. And you can have situations where in an intensely local market where there's a high taste for quality and hopefully you're only doing this once and it's a big budget thing that you just want to make sure that like in the old days they used to say, nobody ever got fired for buying an IBM. You know, yes it costs more to go with the well known caterer, but you know it's not going to be screwed up, and that your mother

in law is not gonna hold against you. You know that he saved us five hundred dollars and he got us a thing that went horribly wrung right at a certain point is just not even worth it, which I mean I think you know, throwing out somewhere you know econ buzzwords. I mean, that's a lot of demanded elasticity too. I mean, I'm thinking, like the Plaza Hotel, doesn't matter

how much the Plaza Hotel costs. There's always going to be someone who's going willing to pay the venue price to have their winning at the Plaza Hotel in New York. It doesn't really matter like the I mean, the amount that they I mean, this is just the principle last Disney. Right, the amount that they raised that venue price buy is going to have a very different effect of how many people are become unwilling to buy it. Right. That is true,

though there's a there's a somewhat non intuitive result. It comes out of the theory which says, anybody who has market power shouldn't already know that, and they should have already raised the prices up so high that actually their customers are price sensitive, because if they weren't, if if the Plaza hotels customers were as price insensitive as you're describing, then they already should have raised the price even more and just keep on raising it until even the shake

of whatever it says, my god, the plaza cast that money. If you're not gonna pay one cent more. So, I think the basic question of what is a what makes a good more price sensitive have a higher demand. Elasticity is kind of the same thing as well. What are the substitutes? And to the extent that a flower supplier from some other market that's far away is not a substitute, then that's gonna tend to make the buyers less price sensitive.

To the extent that there are big quality differences, that the Plaza hotel is something higher class than the best Western that's gonna make the that's gonna make the elasticity

is different. And the essence of price discrimination, if you just say from the back to the to the brass tax economic theory is you've got to be able to figure out who's more or less price sensitive, and you've got to be able to prevent them from You gotta know who who is more price sensitive, you gotta be able to to identify and charge them, and you've got to be able to prevent them from reselling to others. And in most of those cases the normal problems that

that people face. So take the airlines, their price discriminating, but they have the problem of trying to figure out who are they know there are some not sensitive to price customers, but they don't know who they are just

from calling up. They know that their business people. But they if you call and you're a business person and you use a lot of hey, dude, you know, and you try to sound like a student and dress like a student, uh, so that you would get a lower price, they have to design the product to force you to stay a Saturday, to force you to have a long

um buy it well in advance. All of those are just things that they're using to try to get you to separate yourself yourselves into the types of customers you are. People who supply weddings don't have to do that because they know wedding customers are less price sensitive and they know you're getting married. Hence the guy with the with

the chicken dinners. For me, my goal, as I said to my wife, I said, my goal on the food is I don't want anyone to remember the food at our wedding in any way not good and not bad, because if they remembered him like that was the best food I ever had, too much, way too much, and if they remember it was like that was horrible. I didn't want that. But just some middle ground would be totally fine. So I'm not going to get Boston Market to cater the wedding. But you know, as long as

it was of acceptable quality. But as soon as the guy heard that it was for a wedding, he was like, you just solved my problem because you just tell me that you are not price sensitive, so price is higher. Okay. So Austin, one last question. Two of your students their PhD and this is hypothetical. Two of your students. So I was like, who know, these are just hypothetical students economics PhDs. And they go to you and they're saying that we want to avoid all these traps. We want

to have the most price efficient wedding. How do you do it? Let's let's make this actionable. Oh I think we're gonna say, do you tell them not to get married on a positive note? Um? Okay, so how you do it? Look, the secrets of price discrimination to the merchant are they have more information than you have. They know how price sensitive you are, and they're trying to prevent you from doing uh resale and prevent the cross shopping. So you try to beat them on every on every

measure one you leave them like scratching their head. Wait, are these people who want a fancy wedding or not, you know. So so you drop things, You're like, yes, we want that, and you know, the the groom to be says, uh, we want we want fine China. And then in their mind they're like, ah, so this is

gonna be expensive wedding. But then you plan it and you say like, do you think we should um do you think we should have free gum as, the as, the as, the departure present, you know, at the wedding, And so the first is like, wait, what you know? And so one of you is wearing something that's like ripped and really kick pull up in a car that's dented, you know, so they don't know what to make of you.

Are you a person who's what they want? If they conclude you're a person who wants only the finest, then you're gonna be Mr Markup or Miss mark Up to them. They're gonna jack up the price of everything. So you want them to think you don't have as much money um as as they originally thought to shop around as much as you can. Every additional bid you get is gonna just make you that much more informed and that much better able to play off against them on No wait,

a second. You know you're gonna charge me a hundred dollars a person for the food, but I can get the same thing for these other guys for seventy five. You know you forced them to compete because competition destroys their ability to price discriminate. And if you can, you find some some opportunity for resale. You know you you got you got left over wine bottles or something. You friends getting merry, you hand them the wine here, you know.

So So I think basically the theory says you just you gotta try to and I guess it also says if you can help it. Normally, the economists take your demand as given. They have no input on how bad you want something. Um. They then just go from given that, here's how bad you want it, here's how to try to get more competition, to make the market blower. As your friend, I would tell you, try to not have anything you want so bad that you're like, I will pay any price to make sure that we have a

band that does blah. I will make sure we must have orchids. If it's not orchids, you know, I'd rather get married next year. Anything that you really care about, These guys are excellent at figuring that out and charging you for it. So so reveal nothing got it, Talk only to your spouse. Don't ever identify anything in front of the merchants. Thanks for the Austin. I gotta say I shopped around I think a fair amount, but I'm not sure that I went sort of full incognito with

the half rags half riches perspective like you brought up there. Um, I guess. I guess the moral of the story is that you know, weddings, even though they're a big business and they're all over the place and they happen all the time, they sort of defied the rules that we all learned on the first day of a Yukon class, which is that people tend to make rational decisions. The cost benefit analysis UH sewed quite a bit when it comes to uh these hopefully once in a lifetime events.

I guess love truly makes people irrational. Indeed. Well well, Austin, thank you so much for joining us and giving us some tips on how to have a cost efficient wedding, and really appreciate it. Um and Brian, thank you as well for kind of giving us some of your experiences and joining us here. In the studio. Thank good luck, Brian,

it's a great future ahead of you. Appreciate Austin. Yeah, well, Benchmark will be back next week, but until then, you can find us on the Bloomberg terminal, Bloomberg dot com, iTunes, pocket Cast, and Stitcher. While you're there, take a minute to rate and review the show so that more listeners can find us and let us know what you think of the show. You can talk to us and follow us on Twitter at beach Patta and by Kate Smith, and you have to follow Austin as well his Twitter.

His Twitter account is great. Check him out at at Austin Underscore Cool Spain. Thanks for joining us and we'll see you next week.