Tag Archives: Incentive

How to Rip People Off Like Disney World

If you’ve ever visited Disney World, or some other overpriced resorts (last year I visited Warwick Castle and Legoland in the UK, both appallingly people-traps) you’ll have done what I did: vow never to come back. Of course, the companies running these places both know that and don’t care — which is why they are ripping you off royally while they can.

Seethu Seetharaman, an associate professor of management at Rice University’s Jesse H. Jones Graduate School of Management, calls it a variety-seeking market and says it doesn’t just apply to tourist attractions:

Turns out that the resorts in Orlando are in a market where consumers want variety. Indeed, if a family is in Orlando for a week or more, there is little chance — at least if parents and children want to remain on speaking terms at vacation’s end — that they’ll do the exact same thing day after day. Instead, they’re likely to visit both Universal and Disney World and take in as many different rides and sights as possible; in other words, they’ll seek variety.

Seetharaman says that the same is true of people who are too lazy to shift brands: what he calls consumer inertia:

Using a mathematical model, Seetharaman, along with his research partner Hai Che, an assistant professor of marketing at the University of California at Berkeley, was able to determine that the impact on price in both variety-seeking and inertial markets is similar. “The main point of the paper is that in markets where consumers seek variety, firms have an incentive to rip them off,” he says. “The surprise is that when markets are characterized by the opposite of inertia, the exact same incentive in terms of price competition that characterized inertial markets goes through as well.”

Basically, we’ll pay to go to Disney World whatever it costs, especially if we’ve already gone to Universal Studios or whatever else is within our daily trip radius. To that I’d add a couple more observations:

  • it pays to charge at least what rivals in the neighborhood are charging, because if a family has shelled out once, they’re likely to shell out again.
  • Secondly, customers may well equate price with the quality of experience; there’s no point in trying to undercut your rivals because that would imply the experience you’re offering is not as valuable as theirs.
  • This doesn’t seem to stop these kinds of resorts from trying to gain loyalty. There’ll always be some families who want to come back each year, so it makes sense to offer them a steep discount.
  • The only problem I see with all this is that while you want to have a boisterous, noisy crowd, if the queues are too long you may scare away some visitors from the whole concept. In that sense the companies are not rivals at all, but are partners in trying to lure more and more families into the idea of vacationing at these places. Which, as an afterthought, raises the question: should we be thinking cartels and price fixing?

Seetharaman concludes:

None of this comes as a big surprise to companies involved in a variety-seeking market. “The firms know this. They know this market is characterized by variety, so they know that they are going to eventually get their competitor’s previous customers,” says Seetharaman. “Knowing this they are actually trying to rip them off.”

Rice University | Explore Rice

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Bruce on Phishing: It’s the Banks, Stupid

Bruce Schneier again talks sense, this time about phishing: Schneier on Security: Phishing

Financial companies have until now avoided taking on phishers in a serious way, because it’s cheaper and simpler to pay the costs of fraud. That’s unacceptable, however, because consumers who fall prey to these scams pay a price that goes beyond financial losses, in inconvenience, stress and, in some cases, blots on their credit reports that are hard to eradicate. As a result, lawmakers need to do more than create new punishments for wrongdoers — they need to create tough new incentives that will effectively force financial companies to change the status quo and improve the way they protect their customers’ assets.

(Here’s the full column at Wired, and here’s a discussion on Slashdot.)

Regular readers of this column will know this is similar to what I’ve been harping on about for a while although this is much better written and argued than anything I’ve said. Banks have got to accept responsibility for the problem, and devise solutions. To be fair, some are: My bank has finally gotten around to issuing SecurID-type number pads, and secondary authorisation for online credit card transactions.