

Buffett Will Steer Investors to Airbnb to Avoid Price-Gouging by Omaha Hotels - tim_sw
http://blogs.wsj.com/moneybeat/2014/04/08/buffett-will-steer-investors-to-airbnb-to-avoid-price-gouging-by-omaha-hotels/?mod=yahoo_hs
for BRK&#x27;s annual shareholder meeting
======
humanrebar
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?

~~~
digikata
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.

~~~
jhonovich
"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](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.

~~~
makomk
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.

~~~
r00fus
Terms to be aware of: Tacit Collusion [1], Price Leadership and Price
Signaling.

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

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

~~~
3825
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...](http://blogs.marketwatch.com/thetell/2013/09/20/offering-tips-at-
georgetown-buffett-tips-cap-to-amazons-bezos/)

[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](http://services.amazon.com/fulfillment-by-
amazon/pricing.htm)

~~~
celticninja
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.

------
yoloswagins
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.

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

~~~
yoloswagins
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.

------
PhasmaFelis
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.

~~~
tvladeck
> 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).

~~~
PhasmaFelis
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._

~~~
tvladeck
> 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...](http://elibrary.worldbank.org/doi/book/10.1596/1813-9450-2445)

~~~
PhasmaFelis
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.

~~~
tvladeck
> 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.

------
dangerlibrary
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.

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

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

~~~
ninv
How many people are going to Omaha for vacation?

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

~~~
27182818284
>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_

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

[http://en.wikipedia.org/wiki/Loss_leader](http://en.wikipedia.org/wiki/Loss_leader)

------
davidf18
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.

------
daned
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.

------
not_paul_graham
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!

