Buffett Will Steer Investors to Airbnb to Avoid Price-Gouging by Omaha Hotels | Hacker News Reader

Buffett Will Steer Investors to Airbnb to Avoid Price-Gouging by Omaha Hotels

blogs.wsj.com

55 pointstim_sw67 comments

for BRK's annual shareholder meeting

It seems odd that Buffett and the WSJ would call this price gouging. There are high prices brought about by low supply and high demand. Sounds like Econ 101 to me. Am I missing something?

The fact that they can get a better deal on AirBnB reveals that the market is not as supply-constrained as the hotels would like us to believe.

A better deal for an unlicensed premises.

Except that that is adding supply that didn't exist before - before AirBnB was popular, there was no reliable way to exploit it. And while AirBnB is competition, it's not the same thing as a hotel room.

My point is that I don't think there's anything nefarious going on. Demand is high, so the hotels raise their rates. And the high demand is predictable because it's due to a scheduled event. Presumably, the existence of AirBnB will cause the rates to go down somewhat.

An Econ 101 model of the world breaks down in many ways - this is one of them. If the supply is not in doubt, but the hotels all raise the prices collectively knowing that the investor meeting is being held, it could be interpreted casually as price gouging.

The situation is like a prisoners dilemma for hotels. If they all raise prices and none of them break rank in price, then they all make more money. BTW, just by pointing out the option of Airbnb, Buffet makes it more likely for a given hotel to break rank in a collective price bump.

Another way for Buffet to break gouging might be to publicly announce the price spikes as something driving consideration of future alternates for his meeting. But his past behavior makes that unlikely given that he would likely have to shift to areas with larger travel markets so as not to be a large percentage of the existing travel capacity of the locale.

I don't see the prisoner's dilemma aspect to this. If a hotel lowers their prices considerably, they will probably fill up fast. Some of the other hotels may lose some business, and have to lower their prices somewhat, but they will probably not have to lower their prices down to what the "defector" hotel did.

A prisoner's dilemma situation requires good outcome if everyone colludes, and a terrible outcome for all if even a single prisoner defects. I don't see a terrible outcome for all if one hotel greatly reduces their price.

The "terrible outcome" is that if one hotel defects, more are tempted to defect (defect or allow the defector to capture more of the profits), and if all hotels compete on price, everybody's profit margin is lower. If demand is actually greater than supply, prices rise, but if supply is greater than demand, then the possibility of the price collapsing because of defection is greater.

My point was that the period of defection would not last long, because of the high demand; the cheap supply would be gobbled up quick. The hotel prices are the result of organic market forces, not collusion.

> An Econ 101 model of the world breaks down in many ways - this is one of them.

Nope, this is exactly what would be predicted by Econ 101: Microeconomics. The demand curve during the shareholders' retreat is shifted up/out relative to a normal one during other weekends, leading to higher prices even given no change to the supply curve.

"If the supply is not in doubt, but the hotels all raise the prices collectively knowing that the investor meeting is being held, it could be interpreted casually as price gouging."

No, that would be collusion. They would be running a cartel and that would be illegal.

Worse, your speculation that Buffet is doing this to get hotels 'to break rank' is absurd. Metropolitan Omaha has ~10,000 hotel rooms (source - http://www.visitomaha.com/meetings/faqs/#.U0R2_61dUnI) compared to the 30,000 people who plan to visit _just_ for the shareholder's meeting. There is far more demand than there is supply of rooms, this is simply a rational response to that.

I didn't mean to imply collusion as I have no evidence of that. (As an aside, just because it's illegal doesn't mean it's not occuring.) Not sure if my terms are the correct here, but in my mind I was thinking collective != collaborative - in that it's possible to act collectively by exchanging public market information without crossing the line of colluding.

From what I recall, it's illegal for companies to get together and agree not to raise prices, but there's no law preventing them from noticing that their competitors are putting their prices up and raising their own in unison and this is actually quite common.

Terms to be aware of: Tacit Collusion [1], Price Leadership and Price Signaling.

[1] http://en.wikipedia.org/wiki/Tacit_collusion

"The situation is like a prisoners dilemma for hotels. If they all raise prices and none of them break rank in price, then they all make more money."

This is really just competition, with the possibility of collusion, which is very much Econ 101.

Also in Econ 101: All else being equal, if you can solve the same problem at a smaller cost, do it.

When someone says "price gouging", you imagine a vendor raising the price dramatically when they see that someone is in urgent need of something and in no position to negotiate. For instance, if a gas station owner raises the price to $50 a gallon when they see someone limping up with a gas can, and then lowering it again when they leave.

This simply does not apply to an investor conference. There is plenty of advanced notice for people to plan accordingly (perhaps even -- gasp -- invest in more hotels if they are raking in so much dough).

It seems pretty simple to me. There's a demand curve for the conference, which determines the ideal total conference price (which sells out the conference just barely). If people spend less money on hotels, that leaves more money for the airlines and the conference ticket price. It won't actually go back to the attendees, because that would create a shortage of tickets.

> When someone says "price gouging", you imagine a vendor raising the price dramatically when they see that someone is in urgent need of something and in no position to negotiate. For instance, if a gas station owner raises the price to $50 a gallon when they see someone limping up with a gas can, and then lowering it again when they leave.

It seems like your example basically fits the real world one to a T. The investors are coming into town with their "empty gas cans" (i.e. need for a place to sleep) and the prices are jacked up accordingly until they leave town.

> This simply does not apply to an investor conference. There is plenty of advanced notice for people to plan accordingly (perhaps even -- gasp -- invest in more hotels if they are raking in so much dough).

Are you daft? Yeah, all the investors need to do is build a hotel in advance of the meeting! Or they could try alternative options, such as sleeping on the street, or in an airport.

"Or they could try alternative options, such as sleeping on the street, or in an airport."

Or not go to the conference. It's a business transaction: if the total price of the conference, including travel, is worth it, then go and be happy to reap the rewards. If it's not, then don't go, and they are no worse off. That calculation can be made before any other commitment is on the line, and certainly before they actually arrive in Omaha.

The motorist probably made a mistake or miscalculation that left him too far from a gas station, which he didn't have any idea would happen when he woke up that morning. He had to make a choice of which direction to walk and he was in for a couple miles of walking, so he could not easily see the price (much less comparison shop) until he had already walked a long distance.

The scenarios are as different as night and day. A high price is not "gouging" (by any reasonable definition) unless there are some other factors involved.

I'm simply stunned that we are even discussing the idea that hotels are somehow exploiting travelling investors by raising the price by a known amount during known times.

When an old brick-and-mortar business does it, it's price gouging. When a hot valley startup does it, it's "surge pricing". Welcome to the tech press.

Price gauging is simple Econ 101 theory. It is drastically raising the price in response to a drastic change in the demand (or supply curve). The shareholder meeting causes the demand curve to become much steeper (i.e. the demand is more inelastic). The hotels know they will sell out supply at a much higher price, so why not raise their prices much higher? It is no different than doubling the price of umbrellas when it rains or raising the price of bottled water immediately following an earthquake. In the theoretical profit maximizing world of Econ 101, it is good business. In the real world of morals, ethics, and public perception, pure profit maximization isn't always the best long term business plan.

I agree that "gouging" seems like the wrong term, but it was used once in the title and once more in the article: "This price-gouging annoys Mr. Buffett..." So, we don't actually know if Buffet himself called it gouging. He is quoted as saying he wants his shareholders to not have to pay as much, and points them toward a service that might provide a lower price for accommodations. Seems reasonable to me.

Successful businessmen only like supply-and-demand when it benefits them.

They squall like babies when it works against them, however.

And, this will only work until the hotel goes out of business. Then the AirBnB crowd will lift their rates, as well.

No, in this case it actually is price gouging.

If there are 1000 hotels on the market for a certain weekend in month X. Those hotels will see people search for and book a room. Initially those rooms will go for a very low rate. As the date nears, demand will increase and the price of the remaining stock will rise, so that the few rooms that remain as the weekend nears are made available at really high prices.

However if there are 1000 rooms and the hotels know the specific weekend and the nature of the people that will require the use of those rooms and they proactively price all those rooms at very high rates prior to even experiencing the demand, that is price gouging.

I wonder if Buffett would invest in a business which didn't increase their prices when they knew demand was going to spike.

Warren Buffett has said Amazon.com founder Jeff Bezos is a great businessman[0]. It is worth reiterating what Jeff Bezos thinks about price gouging: “There are two kinds of companies: those that try to charge more and those that work to charge less. We will be the second.”

Perhaps you will argue that increasing the storage cost for fulfillment by Amazon[1] is an example of price gouging. I will let smarter people answer why it is OK for Amazon.com to charge more during the holiday shopping season. I'd imagine the simple reason is greater volume of transactions. However, with the way Amazon.com does storage, a 33% hike looks strange.

[0] “He’s a great businessman and a good guy, too.” http://blogs.marketwatch.com/thetell/2013/09/20/offering-tip...

[1] Currently $0.48 per cubic foot per month Jan-Oct and $0.64 for Nov-Dec. http://services.amazon.com/fulfillment-by-amazon/pricing.htm

could this be linked to the fact that amazon needs a lot more storage for its own uses in november and december to hold all the extra product they will shift in the run up to xmas, hence the price increases because this is more in line with what they would be paying elsewhere.

This gives me an idea.

Contact house/apartment landlords in Omaha about a month before the meeting, and offer to set up an airbnb in their empty units. The vacancy rate of rental housing in Omaha is about 9%, so Landlords would be interested.

Seems like once you rent and move enough beds, linens, tables, chairs, etc you'd have cut into your profit margin significantly.

High end hotels will buy new furnishings every 18-24 months. The used furnishings are bought by Hotel Furniture Liquidators (HFL) who sell the furniture to mid-tier hotels. Working with the resellers to rent a dozen rooms of furniture should keep costs down.

It's depressing but not hugely surprising to find that the comment thread is mostly people defending price-gouging.

I've just spent a while trying to come up with an argument against, but really it comes down to whether your personal values prioritize cash flow over being decent to people, and that's not something I can talk anyone out of in a web post.

Isn't that part of a general problem with corporations? It's almost a requirement to prioritize cash flow over being decent to people.

No, that's a problem with firms where the voting power is distributed among people whose only shared interest is making money.

The corporate form is pretty much tangential to this, relevant only in that that form is often attractive to widely held (in terms of equity distribution) firms regardless of distribution of authority, and the more widely distributed authority is (which often roughly parallels equity distribution), the more likely that the only shared interest (or at least, the most salient shared interest) is financial profit. But, conceptually, you can get the same issue with big partnerships, LLCs, etc. -- or even small (in number of partners/members) ones and sole proprietorships, where that's all the partners/members/owners care about.

Yeah, pretty much.

There's an interesting observation about audience selection in here somewhere. Your typical hacker tends towards progressive politics and attitudes, and would be likely to condemn price gouging. "Hacker News," though, is associated with Y-Combinator and disproportionately attracts the Valley-startup/venture-capital/exit-strategy subset of hackers, who tend a lot more towards Objectivist-libertarian profit-obsession, so you get what you see here.

Except that price gouging commonly refers to taking advantage of people in duress. Voluntarily going to Omaha for a convention and finding that hotel room prices are higher due to higher demand is not duress.

Are hotels not supposed to increase nightly rates when there is increased demand? Should hotels in Manhattan sell their rooms for the same price as those in Omaha?

There is no "hotel lobby" that's pushing to outlaw selling your own residence on AirBnB. However, it's usually illegal because of the liabilities and disturbances a transient crowd can cause for people living around them, and it's the people that want these restrictions.

I upvoted your comment for the first two paragraphs, but I disagree with the third. The hospitality industry is big, they have lobbyists, and I would be surprised if they are not lobbying against AirBnB in some way. A quick Google search indicates that they are.

I don't see this as price gouging, though. Maybe that's just because I have been conditioned to expect lodging to be expensive in places where a popular event happens. But in this case, I see it as normal things-cost-what-people-will-pay effects. Part of it is that I don't see a hotel room, or even an investor visit, as a necessity. Both are luxury goods.

Jacking up the price of water after a hurricane? I see that as price gouging, even though it's also following basic supply-and-demand. But water is a human necessity, and I find it repugnant to exploit the circumstances of a natural disaster to charge more for a necessity.

I think what's different here is:

(1) The surprise factor -- there is plenty of time to plan for a conference and nobody should be surprised by the going rates.

(2) The business factor -- attending an investor conference is a business-to-business transaction.

So I personally don't see anything indecent here.

Charging a high price is not bad by itself, and can actually have a number of good effects. For instance, if prices are high during times of high demand, then people might naturally share rooms. That's more efficient than a family deciding that the price is low, so they might as well get two rooms; leaving another family with no room at all. An innkeeper who sells out all of the rooms at low price and low density isn't really doing any favors to the people who are out in the cold.

> it comes down to whether your personal values prioritize cash flow over being decent to people

This is absolutely false. My personal values prioritize decency and integrity, but also logic, and my analysis of the facts leads to the inescapable conclusion that shocks to demand/supply should lead to shocks in the price, and suppressing those shocks just leads to more negative distortions and less value for everyone.

It is counterintuitive that, say, when a region is hit by a hard storm and supplies are hard to come by, that those holding the supplies (i.e. gas, water, food, etc.) should experience a windfall, but the windfall is only the consequence of making sure that those precious supplies are only consumed by those that absolutely need it. Are inequalities exacerbated in this scenario? Of course. But there is no good way to get around this fact through the price system (there are other, better ways of addressing inequalities here and elsewhere).

During emergencies, many brick-and-mortar stores do not raise prices, and will eat the cost to avoid making people upset. People hold grudges. You may gain in the short term, but are likely to lose in the long term.

Absolutely some do; I consider that orthogonal to the question of whether or not it would be ethical for them to raise them if they wished, however.

I point it out as a counter to the tempting narrative of rational economic thinking versus compassion.

Also, because brick-and-mortar stores don't raise prices (often due to price-gouging laws), people who find themselves in a store with bottled water, for example, will buy much more than they would have if the water was suddenly $50 per bottle. They buy more than they need, leaving none for people who need it just as much but showed up to the store 5 minutes later.

When demand exceeds supply, there will be some mechanism by which some demand will be satisfied and other demand will not. In the case of hotels, it's price, in the case of water in an emergency, it's randomness or physical strength grabbing bottles in the grocery store, and in some cases the government steps in and starts rationing goods.

Wow. I like how you vaulted straight over the defensible middle-ground "hotels charging more during big events isn't actually the same thing as price-gouging" argument and went straight to defending incontrovertible, life-threatening, criminal-in-34-states price-gouging.

> the windfall is only the consequence of making sure that those precious supplies are only consumed by those that absolutely need it.

No. It's it's making sure they're only consumed by those with the most money.

> I like how you vaulted straight over the defensible middle-ground "hotels charging more during big events isn't actually the same thing as price-gouging" argument and went straight to defending incontrovertible, life-threatening, criminal-in-34-states price-gouging.

I did that because it clearly raises the bar for my argument. I have more to prove in the harder cases. And yes, I do think the logic holds despite what our emotions tell us, and I think that for the most part the laws are wrong.

> No. It's it's making sure they're only consumed by those with the most money.

Again, I'm granting that emergencies and other demand/supply shocks heighten the problems caused by inequality, and again, I'm granting that that's not ok and should be tackled appropriately by policy. I'm arguing that the price system is not the best way to tackle this and leads to other problems. This will seem a bit off-topic, but Chile tackled a similar problem in their water system by transferring cash to poor populations while letting their prices for water rise [1]. (This is only meant to illustrate how you can use more than one policy mechanism to tackle separate problems: prices for allocation, transfers for inequality).

You're right, people with the most money can purchase more, but you also have to think about how you allocate scarce resources in the absence of a rise in price: is it first-come-first-serve? Does everyone get the same amount? You have to have some other mechanism to allocate the scarce resources and they each have their problems.

Also, you must think about the supply side. People will find a way to supply areas with high prices. People are creative. In fact, the high prices in the Omaha rental market spurring people to turn to Airbnb is a perfect example of why we should let prices rise.

[1] http://elibrary.worldbank.org/doi/book/10.1596/1813-9450-244...

It's true that first-come-first-served isn't optimal, but at least it's not as brazenly monstrous as turning away people whose need is just as great because they can't afford to line your pockets as thoroughly. Limiting the amount per customer has a lot of potential, though.

You're also assuming that profit-gouged emergency supplies are necessarily limited. If the local water supply has failed after a hurricane, and you've got enough bottled water to comfortably supply your community, you've still got a captive audience; you can maximize your profits by forcing them to empty their wallets to survive, if you're an asshole.

> You're also assuming that profit-gouged emergency supplies are necessarily limited.

You're right, I'm making this assumption. I have to make this assumption assuming there are at least a few possible suppliers (i.e. a few gas stations or convenience stores) because otherwise there would be no supply shock and concomitant price increase.

> and you've got enough bottled water to comfortably supply your community

Here I would say you're begging an important question, which is in regards to who has this and other important information? How would a convenience store owner know that the overall bottled water supply in the area is enough or not - and how could they possible make those calculations in time to properly allocate the water? Prices are a great way to spread information and incentivize people to get creative in finding a solution. If bottled water prices go up 10x, I guarantee you people will find a way to get more bottled water there.

Here are some more thoughts from people far smarter than me:

Tyler Cowen: "I agree gouging should not be illegal" [1]

Paul Krugman: [On Uber's 7x surge pricing during horrible snowstorms in New York] "This makes a lot of sense from a rational economic point of view" [2]

[1] http://marginalrevolution.com/marginalrevolution/2003/09/mor...

[2] http://krugman.blogs.nytimes.com/2013/12/21/uber-and-the-mac...

"A rational economic point of view" means that you value your personal cash flow (including factors like long-term customer goodwill, admittedly) over other concerns, which is what I already said. If someone gives you a magic button that kills one random stranger and then turns into a $100 bill, the rational economic decision is to press it. You're not scoring any points here.

No, Krugman is making the point (in his whole blog post) that price "gouging" allocates resources in the best possible way, and that our emotional response to it sometimes confounds this "first best" outcome. Which is actually a good description of the debate we're having here (on the broader thread).

You keep saying "your personal cash flow" as if I or Krugman or others actually do make a buck off selling services to those in distress. I work in climate policy; I don't sell anything. You seem to think it's not even possible for me to actually, really, think that our natural, emotional responses to price "gouging" does us a disservice. I don't have anything to gain except a world that works a bit better.

I wonder how long it will take for some of these investors to buy cheap apartments in downtown Omaha and charge $350 a night during the meeting.

3 nights X 350 = 1050$, it will take 100+ years to recover the cost

Don't forget property tax, and other fixed yearly costs that don't go away when the apartment is unused.

Because they couldn't rent it out or AirBnB it the other 362 days of the year?

How many people are going to Omaha for vacation?

I know someone who bought a house in Austin to rent out on Airbnb during sxsw. He rents it out 3/4 of the year but makes most of his profit that 2 week period

That's literally not saying anything all other than he's at least breaking even, and those extra 2 weeks make at least $1 profit.

And if he's only breaking even, isn't that okay?

If he gains net $0 from it, and spends net $0, he'll (eventually) have a land asset.

Illiquid and potentially risky, but still. Getting a mortgage paid for you is a nice deal.

Or, he could take the down payment he put on the place and invest that and come out ahead. Granted this person probably does make more than $1, but if they didn't, there are other better uses for money.

Interesting the supply/demand in the extreme is considered Price-Gouging. What should we call Gillette's pricing on razors?

>What should we call Gillette's pricing on razors?

Razor blade pricing? This is what I grew up with it being called slangly. As in, give away something up front and then gauge huge on the backend. Another example would be that He-man toy that had crazy-expensive slime refills. shrug

Just FYI, that's called a loss leader. Printer ink is the classic example.

http://en.wikipedia.org/wiki/Loss_leader

"What should we call Gillette's pricing on razors?"

A triumph of marketing since you can get as good or better razors from companies like Dorco for a fraction of the price.

Also interesting is that the oft-quoted example of giving away the razors and making money on the blades is apparently more complicated in Gillette's case than the shorthand version suggests: http://www.law.uchicago.edu/faculty/research/randal-c-picker...

You can always switch to a DE merkur if you have the time.

.05c a blade. Awesome experience.

/r/wicked_edge

Mr. Buffett should just move his shareholder's meeting to a city with many more hotel rooms such as Las Vegas, Chicago or Orlando which has a far greater supply of hotel rooms than Omaha and also has far more accessible flights.

I imagine Airbnb units will raise prices as well, as happened when I tried to book Airbnb in New Orleans without realizing it was Mardi Gras.

Regardless, this seems like a huge PR win for Airbnb given the recent news about crackdowns in SF/NYC.

Kudos to them and best of luck!

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