Rationing by price is usually more efficient than rationing by queuing, so there’s always an economic puzzle to be solved when queuing is employed in voluntary markets (as opposed to contexts in which pricing is banned or controlled, such as organ donation or rent-controlled housing). Why, for instance, do nightclubs and restaurants choose to make people wait outside, rather than hiking their cover charges or prices for food and drink?
Economists have proposed a number of answers to the nightclub/restaurant puzzle, but I’ve lately been pondering a different puzzle: karaoke queues. At karaoke venues, the number of people who want to sing is almost invariably larger – sometimes much larger – than the number of singers who can be squeezed into the available time. It would obviously be possible for karaoke hosts to charge a price-per-song large enough to reduce the number of willing singers to the number of available slots. (Indeed, profit maximization might even dictate having fewer singers than available slots.) But karaoke venues almost universally set a price of zero and ration by waiting instead. I’ve only encountered one karaoke venue that had a non-zero price, and even that price was far too low to balance quantity demanded and quantity supplied. What gives?
The obvious answer is that there really are prices; we call them bribes. Anyone who’s done much karaoke knows that most hosts will bump you up the queue if you give them extra-large tips. At some places, your chances of singing if you don’t bribe the host are pretty slim. But why the subterfuge? Why not simply set one price for everyone? The bribery system has a variety of problems, most notably its uncertainty: it’s not always clear whether this particular host takes bribes, how much you need to pay, what you’re really paying for (singing sooner or singing at all?), and so on. I’ve gotten burned by this system myself, when I’ve given “tips” and only found out later that this host sticks to the established queue.
So I have two hypotheses:
1. The absence of prices results from the contract between karaoke host and venue management. The management pays the host a flat fee for the night (this is fact, not speculation) and specifies a price of zero. But why would the management do that? Because the venue makes most of its money from booze, and booze sales are maximized when you have a large number of people waiting around in the hope of getting their chance to sing. I know there are many times when I’ve considered going elsewhere (home or another bar), but I’ve stuck around with the sometimes-mistaken impression that I’ll be singing soon. So the management insists on a zero price to keep as many people hanging around and drinking for as long as possible. This hypothesis is consistent with the common practice of keeping the queue secret instead of letting everyone know where they stand. If the list were public, many people might realize they’re too far down the list and choose to leave.
2. The bribery system facilitates a clever system of price discrimination. Lots of people want to sing, but only a fraction want it enough to pay a bribe. Say you have 50 available slots and 100 people who want to sing. A price of $2/song might reduce the number of willing singers to 50, yielding $100 of revenue. But if you keep the queue in place, the 10 or 20 most motivated singers (who would only have paid $2 like everyone else) will cough up $10 each, yielding revenues at least as high and probably higher than under the pricing scheme. But why not charge everyone $2 each and charge the most motivated singers more? Because then the motivated singers would only be paying for the privilege of singing sooner, rather than singing at all, and they won’t pay as much for that. The bribery system does a better job of sorting the motivated from the unmotivated singers.
These two explanations are not mutually exclusive, but there is a tension between them. If the management is trying to maximize the number of drinking patrons by keeping the price per song at zero, bribery partially thwarts the goal. Motivated singers who pay to sing might leave shortly thereafter, and if other patrons realize they’re being pushed down the list by bribery, they might opt out as well. There may be a kind of principal-agent problem at work: the karaoke host (agent) has incentives that run counter to those of the management (principal), and bribery is a form of shirking. The need to conceal the shirking helps explain why karaoke hosts choose to keep bribery on the down-low while maintaining a secret queue. Still, given that most karaoke patrons know that bribery goes on, it’s hard to believe the management is oblivious. It’s more likely, I think, that the management considers the bribery a portion of the host’s compensation, provided the practice is not so obvious that it drives customers away. This enables the management to pay a smaller flat fee to the host, in essence taking a cut of the bribe revenue. Thus, the current arrangement might in fact constitute an optimal contract between management and karaoke host.