The campus parking game: a demonstration of price discrimination and efficiency.

• Author: Michael, Jeffrey
• Position: Targeting Teaching

1. Introduction

   Classroom discussions of price discrimination are among the most interesting to students because real-world examples abound. However, most presentations of price discrimination are relatively superficial, usually consisting of (i) the definition of price discrimination, (ii) the conditions that must be met for discrimination to occur, and (iii) the three degrees of price discrimination. This approach ignores the decision processes that both consumers and producers undergo when faced with pricing in segmented markets. This article presents a classroom demonstration that can add dimension to price discrimination discussions by engaging students in the decision-making processes themselves without requiring a formal mathematical model. As active participants in a market, students directly experience the welfare improvements that can result from price discrimination. Additionally, this demonstration reinforces the concepts of opportunity cost, property rights, total revenue, consumer surplus, and search costs.

   Our demonstration presents a very familiar decision-making scenario, that of trying to park on campus. The use of a context with which students are already familiar and within which they have made previous decisions (perhaps even a few minutes before class) helps them move from the concrete to the abstract. In addition to consumer and producer surplus, we use skipped classes and time spent searching for a parking space as informal and familiar measures of inefficiency.

   Unlike existing price discrimination experiments, students engage in three pricing mechanisms: uniform pricing, second-degree price discrimination based on parking lot location, and a hybrid third-degree price discrimination based on commuter type. (1) The demonstration is very simple to run, taking about 45 minutes of class time to conduct with additional time for discussion. It is appropriate for classes in principles and intermediate microeconomics, industrial organization, and environmental economics.

2. Conducting the Demonstration

   Basic Setup

   This demonstration is based on the perennial problem of campus parking with students playing the role of commuters. As on most campuses, some lots are more desirable than others, but in these lots there are not enough spaces available for everyone. In the baseline scenario, all commuters pay the same to park, regardless of lot, and must decide whether to try for a convenient lot that is likely to be full or to resign themselves to a remote lot where there will be available spaces. In later rounds of the demonstration, the commuters face different pricing structures and can see how the prices affect their own and other commuters' decisions. Most importantly, the commuters will see how both second- and third-degree price discrimination can result in increased consumer surplus as well as more efficient parking on campus.

   There are four types of commuters to campus: faculty (F), student type 1 (S1), student type 2 ($2), and student type 3 ($3). There are also four parking lots on campus: lot A in the center of campus, lots B and C on either edge of the main campus, and remote lot D. Table 1 shows each type's willingness to pay for each of the four lots. Faculty have the highest value for the central lot and the lowest value for the remote lot. Types 1 and 2 students have similar values, but the two types spend most of their time on opposite ends of the campus (e.g., art vs. science students), and thus type 1 prefers lot B and type 2 prefers lot C. Type 3 students have the lowest valuation for lots A, B, and C. Finally, all the students (but not the faculty) have a positive value for staying home and watching TV. We recommend that you select two students to assist as lot attendants and make the remaining students commuters. There should be an equal number of F, S1, and S2 commuters, with each group approximately one-quarter of the class size. The number of $3 commuters is flexible so that you can adjust for attendance without affecting the outcome of the experiment. The capacity of lots A, B, and C should be set equal to the number of F, S1, and S2 commuters (i.e., each lot should be approximately one-quarter of class size). Lot D has unlimited capacity. For example, with 30 students, you want two lot attendants; seven commuters of each type F, S1, and S2: and lots A, B, and C with a seven-car capacity.

   Materials

   To conduct the demonstration, you will need four small boxes or containers, index cards, and a copy of the instructions for each student. The boxes represent the parking lots and should be large enough for an index card to lie flat but small enough that students cannot count the number of cards in the box. Visually reinforce the attractiveness of the lots through their location. Place lot A in the front center of the room, lots B and C off to each side but still relatively accessible, and lot D in an undesirable location with an obstruction (e.g., under a table, behind the trash can). Each commuter will receive an index card that tells them their type and values for each lot and a set of identically numbered parking cards (cars) equal to the number of rounds you plan. Commuters will use a "car" during each round, and the number on the "car" allows the commuter to identify if their car has been unable to find a space in a lot and needs to be reparked. (2) Each student will also need the written instructions for commuters and a commuter record sheet.

   Running the Game

   Bring a transparency of the instructor record sheet or copy the headings from it on to the blackboard so you can record the results of each round. Ask two student volunteers to be parking lot attendants and have them help you pass out the commuter instructions, commuter value cards, and the sets of numbered parking cards (cars). Give the lot attendants their instructions to read while you read the commuter instructions aloud to the other students. Make sure the students understand that if a lot is full, you will randomly select the cars that are unable to find a parking space. Also go over the examples to make sure that students understand how to calculate search costs and consumer surplus.

   At the beginning of each round, announce the price schedule and have students make their parking decisions by taking their cars to the lot they have chosen. Once everyone has made the decision of where to park their cars, the attendants should count the cars in each lot. Counting cars should be done out of view of the students and as quietly as possible to avoid astute students determining which lots are full without having to drive to them. If a lot is over its capacity, the instructor or lot attendants will randomly remove cars until the number of cars remaining equals the number of spaces. Record the number of cars remaining in each lot on the instructor record sheet (but do not post this information until the end of the round) and call out the numbers of any cars that were randomly removed from overcapacity lots. It is important that students understand that the cars removed from the lot are randomly selected. This random selection prevents a mad dash to the front of the room, which may occur if students believe cars are removed on some other basis, such as first-come, first-serve. The students who are removed from the lot incur a $5 search cost and must come to the front of the class to reclaim their car, while the lot attendants return the lots to their original places. The students may choose to try a different lot or return to their seat with the car and receive their home value. Do not indicate whether any of the other lots are full: Students can find this out only by "driving" to the lot and attempting to park. If students try to repark in a lot that was already full, they incur another $5 search cost ($10 total) and once again have the option of trying a third lot or going home to receive their home value. When all the students have either found a parking spot or chosen to go home, the round is over. On the board and instructor record sheet, write down the final number parked in each lot, the total number of searches, and the total number of cars parked on campus. You might also want to quickly calculate the total revenue collected in parking lees. Note that search costs are psychological costs incurred by drivers and are not included in total revenue. Leave the results for each round on the board so they can be compared in the end of class discussion.

   Setting Prices Schedules for Each Round

   Given the lot values displayed in Table 1, we calculate prices for...