cars

Everyone Hates Free Parking

by Elaine Schwartz    •    Mar 6, 2012    •    295 Views

By Mira Korber, guest blogger.

Last Friday evening, two unexpected things happened at the highly attended Palm Beach International Equestrian Center (PBIEC) “Nations Cup” event.

1. I saw Donald Trump in the flesh — he’s very tall — from about two feet away.

2. I noticed an unusual parking situation. The “free” lot held 12 cars. The $20 parking fee lot housed (from my best guess) between 1,000 and 1,500 vehicles.

I would have expected the free lot to be full; a shiny complimentary shuttle bus carted me to the event and back while paying customers eked in and out of full “lots” (riding arenas at the showgrounds) at a painfully slow rate.  In fact, my sleek “free parking” shuttle bus followed Donald Trump’s top of the line Mercedes right out of the horseshow.

Why weren’t more people on that “free” shuttle efficiently following Mr. Trump off the premises?

“Free parking,” on principle, sounds “worse” than parking you have to pay for. The old maxim, “You get what you pay for” seems to have caused the sparsely-populated free lot. Demand was higher for a more expensive service because the consumer automatically expected it to be better.

This fascinating paper from Wharton School of Business (“When Do Higher Prices Increase Demand? The Dual Role of Price in Consumers’ Value Judgments”) explains the idea with case studies and experiments. Though the paper states that “an unequivocal positive relationship between price and perceived quality is yet to emerge,” it cites some situations that reflect the scenario where high price leads to high demand.

A parallel to my parking story emerges with the following case study (pg. 3): a $79 piece of technology called the Minivac 601 gained a strong customer base in schools and home users. Large corporations, however, dissed the product. But when Minivac 601 became Minivac 6010, and its price went up to $479, suddenly the product had purchasing appeal to large companies. The new, expensive Minivac was simply a different color and slightly modified design, but nothing more.

For some people, free parking costs too much.

The Economic Lesson

Demand reflects decision-making. In the case of parking at PBIEC, I witnessed a greater demand for paid parking than free parking. Attendees determined that paid parking had a greater utility because it validated their status as wealthy spectators.

While one might expect the demand curve for free parking to be horizontal and almost infinitely long, it turned out to be shorter than the paid parking curve because it offered lower utility (status) to consumers.

While this doesn’t really make a lot of sense, it turns out our human behavior doesn’t follow rational economic theories. Daniel Kahneman, 2002 winner of the Nobel Prize, explains our irrationality, quite rationally.

An Economic Question: Have you ever dismissed something as “too cheap” to be any good?

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