Wikipedia:Reference desk/Archives/Humanities/2019 January 24

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January 24

Economics of go-karts and rental cars

I found it shocking that during my last vacation I paid some average double digit amount for renting a car per day, but when looking around for entertainment in a local shopping center the go-kart would cost half the daily price for a car, but for just 8 minutes.

What makes go-karts much more expensive than normal cars? The access to the track? No mass production? Something else? --Doroletho (talk) 17:43, 24 January 2019 (UTC)

1. Niche means higher profit margins
2. The business must pay for track space, equipment, maintenance and staff
3. Expensive insurance policy because accidents happen more often with go-karts and because the business may have extra liabilities as the accidents happen on its property
4. Go-kart maintenance may be pricier because the karts get more wear and tear per mile than passenger cars for above reason. Parts may be more expensive for reason #1.

Take your pick. 93.136.99.139 (talk) 20:44, 24 January 2019 (UTC)

The ONLY Thing that matters to price is: what the market will bear. If people are willing to pay $10.00 for an 8 minute ride, they will charge $10.00 for an 8 minute ride. There is no other factor involved. --Jayron32 21:22, 24 January 2019 (UTC)

Go-karts are primarily an entertainment thing; they're generally seen as something special, and there's no significant competition except other go-kart operators, so the price is less elastic. Conversely, cars are routinely rented for ordinary life- or business-related purposes, so people will avoid renting a car if they find an alternate mode of transit that's cheaper or otherwise more preferable — rental agencies compete with each other, but also with bus routes, air traffic, etc. And finally, consider the "special" nature of go-karts: most people don't own one, so driving a go-kart is a special event that many people might want to do for the sake of the experience, while most people either own a car already or aren't able to rent at all (can't afford it, have no license, etc.), so very few people will find car rental entertaining. Nyttend (talk) 02:42, 25 January 2019 (UTC)

There is an equivalent with regular cars, though. Around the Champs-Élysées in Paris, there are people renting out Ferraris or other similar top-end luxury cars for 50 euros for 15 minutes (quoting from memory). It's the same sort of deal as go-karts: it's a thrill akin to entertainment; no one pays that kind of money just to get from point A to point B - there are plenty of cheaper options for that. Xuxl (talk) 03:07, 25 January 2019 (UTC)

But that's not Doroletho's situation, which was "some average double digit amount" for renting a car for a day. And top-end luxury cars are hardly "regular cars". Nyttend (talk) 03:15, 25 January 2019 (UTC)

Nobody wants a go-cart for more than 8 minutes. They've had their fill of go-carts after 8 minutes. But they don't want to forgo that experience of using a go-cart for 8 minutes, so they don't mind spending the price of a go-cart for 8 minutes. But a car for 8 minutes is useless. You generally drive somewhere, park a car for a few hours, then get back into the car, and drive somewhere else. You need a car for many hours. It would be prohibitively expensive if it were priced in a way comparable to go-cart rental. Bus stop (talk) 03:34, 25 January 2019 (UTC)

I am not a user, but I understand that car sharing apps let you rent a car (or bike or scooter) for a few minutes and leave it parked in public space. --Error (talk) 18:28, 30 January 2019 (UTC)

• All of these explanations miss a very key point, however, is that people often have the misconception that the OP has, that the price of goods is somehow strongly correlated to the cost or value of goods; that is what I as a consumer pay is somehow some simple formula calculated from what it cost to make, plus some reasonable, but easily calculated surcharge so that the merchant gets their cut too. In reality, price is usually completely divorced from such concepts. The cost of materials+labor+distribution is a price floor for providing a good or service, but there is no such thing as a price ceiling. A merchant will rarely charge you a price that would cause them to lose money, but they have no restraint on the other end of pricing, except "how do I maximize profit by selling this good or service". A go-kart operator doesn't charge based on how much a go-cart is worth relative to other forms of transport, like rental cars. They charge based on how much they can get and still keep people spending money on the go-karts. Comparisons to other, vaguely similar services, like rental cars, is completely pointless. Economists will analyze markets and pricing using concepts like Price elasticity of demand, but that's a sort of ex post facto analysis. A business owner just sets the price at whatever works to bring in the most cash. They aren't there to make things "fair" for consumers (for whatever naive definition of "fair" the OP seems to be working from to decide that go-karts are overpriced), but rather the business owner is trying to feed their family and pay their employees and maybe have some money left over to improve their leisure life. As such, profit motive is all that matters. --Jayron32 04:21, 25 January 2019 (UTC)

• I'm pretty well aware that we don't pay cost+fixed x%. But let's try to view the issue from another perspective:

Both are vehicles. The useful one is cheap, the smaller, less powerful one is expensive.

Would some economic principle imply that certain products+services that are not absolutely necessities, have a higher profit margin? Do economies tend to get really efficient at producing useful products+services? This seems to be the case here, and it's also the case in sugar/chewing gum, water/soft drinks, and so on. Doroletho (talk) 13:11, 25 January 2019 (UTC)

AH! Yes, see Veblen good and Giffin good, economics terms for goods whose pricing is counterintuitive based on things like supply-and-demand curves and cost of production. --Jayron32 13:48, 25 January 2019 (UTC)

• Yes, that's also true. From the business owner's perspective, the business charges what it can get away with. The factors I listed above act to limit that number from above and below. I also forgot something important: #5: monopoly and oligopoly. If that go-kart place is the only one in town, with no local competition, or if all the local go-kart places (as might happen in a tourist spot) have an informal arrangement to keep the prices high then profit margins can be kept extra high. This is still all a consequence of the supply-demand law. 93.136.99.139 (talk) 17:41, 25 January 2019 (UTC)

• They serve different markets though the markets partially overlap. There is exhilaration in driving an automobile and there could conceivably be "transportation" in driving a go-kart if one can disembark at a point other than the embarkation point. But the consumer needs are largely unrelated. One tends not to substitute for the other. Bus stop (talk) 18:03, 25 January 2019 (UTC)

I agree, but I just wanted to point out that the OP never said he was complaining about a lack of fairness. He said he found the difference "shocking", but that's hardly the same thing. --Viennese Waltz 09:03, 25 January 2019 (UTC)

It's only shocking if one expected otherwise. A person is shocked only if their initial understanding of a situation was wrong; being shocked doesn't mean the world was wrong; the world will operate by it's own rules regardless of our emotional reaction to it. If I am shocked about how the world works, it just means I was wrong about how it really works. --Jayron32 14:06, 25 January 2019 (UTC)

You've lost me, I'm afraid. I was picking you up on your inaccurate statement that the OP was complaining about a lack of fairness in the respective prices of go-karts and rental cars. I don't see how your response answers that. --Viennese Waltz 14:10, 25 January 2019 (UTC)

Perhaps Doroletho would like to change it from "I found it shocking..." to "I found it surprising..." Bus stop (talk) 15:07, 25 January 2019 (UTC)

"Comparisons to other, vaguely similar services, like rental cars, is completely pointless." They are not particularly similar despite both having four wheels, an engine, and a steering wheel. Bus stop (talk) 04:33, 25 January 2019 (UTC)

Yes, that's exactly what I understood Jayron intended to convey by using the term "vaguely". {The poster formerly known as 87.81.230.195} 90.217.251.247 (talk) 06:33, 25 January 2019 (UTC)

Yes, I was in agreement with Jayron. Bus stop (talk) 15:16, 25 January 2019 (UTC)

Why can some rich boy like Martin Shkreli famously buy a special medicine producing company, then change the new price to 5000% of the old price and get away with that "stunt" no matter 99,9% Humans agree that this is a unacceptable evil exploit? --Kharon (talk) 12:19, 25 January 2019 (UTC)

"Why can some rich boy like Martin Shkreli famously buy a special medicine..." He is not "some rich boy". According to our article "His parents are Albanian and Croatian who emigrated from Montenegro and worked as janitors." I feel that janitorial employment would tend not to correlate with great wealth. Bus stop (talk) 15:31, 25 January 2019 (UTC)

You are horribly uninformed, as always. Shreli did not get away with it. Doroletho (talk) 13:02, 25 January 2019 (UTC)

No, he did get away with that. He went to jail for some unrelated douchbaggery. The "charging stupidly high prices for the drugs" thing was entirely legal and aboveboard. Whether the kind of person who would do that would also be highly likely to commit securities fraud (the crime he was charged with) is another conversation entirely, but if the only thing he had done was overcharge for a medication, he'd still be walking around free today. --Jayron32 13:45, 25 January 2019 (UTC)

Standing out in such a despicable way has not helped his case. He also has to pay civil penalties. It's questionable too whether he would get any punishment if he had 'only' committed security fraud.Doroletho (talk) 14:18, 25 January 2019 (UTC)

I don't see why it matters. The legal system doesn't decide on convictions and sentences because someone is nice or mean. They decide on them based on whether or not they have broken a law. Shkreli got a sentence to other people who have committed similar frauds, such as Bernard Madoff and James Paul Lewis Jr. and the like, and none of them charged a lot of money for drugs. People who do what Shkreli got convicted of get sentences similar to Shkreli, and it has nothing to do with his jacking up the price of medicines. It really had nothing at all to do with his legal issues. --Jayron32 16:06, 25 January 2019 (UTC)

Regarding “The ONLY Thing that matters to price is: what the market will bear ... There is no other factor involved.”: That’s just wrong, as basic economics has known for many decades or probably centuries. See Monopoly and Profit maximization (especially the sections containing graphs) for how it works with only one supplier. The monopolist produces a quantity such that the marginal revenue, based on how much could be sold at any given price, equals the marginal cost faced by the supplier, which reflects production costs broadly defined to include the cost of tying up assets in things like a go-cart, a go-cart track, etc. as well as the cost of hiring employees. Loraof (talk) 18:34, 25 January 2019 (UTC)

So, what you are saying is that a go-cart track owner (or any business) would set prices lower than what will earn them maximum profit to just, what, make less money because that's better? Can you explain how it is economically better for a business to make less money? How does that benefit it? --Jayron32 01:59, 26 January 2019 (UTC)

Again I suggest that you read profit maximization and Monopoly. I said that the firm would maximize profits, and that that involves cost considerations, not just “what the market will bear”. Suppose that profit is maximized at 100 units of output, and the price that attracts 100 units of demand by customers is $8. The market might “bear” a price of $9, with the quantity demanded at that price being 70. Despite the fact that the market could “bear” a price of $9, the firm will not charge that much because profit is maximized at the lower price of $8. Contrary to “There is no other factor involved” besides “what the market will bear”, in fact cost considerations are taken into account in the determination of the profit-maximizing output. Loraof (talk) 17:55, 26 January 2019 (UTC)

If the market produces maximum profits at $8, then the business owner would charge that as the maximum price the market would bear. Since profits start going down above $8, then the business owner sets his price at that maximum. We're saying the same thing. In your example, the market won't bear a $9 charge because that price doesn't maximize the owner's profits. I certainly never said that the business owner would charge an infinitely high cost, just that the market will determine his maximum price, and he'd set it wherever he could make the most money. In your example, $8 is the maximum price, not $9. We're both saying the same thing; I would have explained the details of my statement pretty much verbatim as you have, so I'm not sure why we are arguing. That's my fault for being unclear in my meaning, but as you have elaborated is exactly what I meant when I made my initial statement. The OPs misconception seems to me to be that the go kart business owner is somehow overcharging because rental cars cost less (by whatever metric he was using), and I was pointing out that the cost of rental cars has little bearing on the cost of go-carts, despite both being vehicles with internal combustion engines and wheels. --Jayron32 14:37, 28 January 2019 (UTC)

From this forum Q: "I'm putting a business case together which is looking at opening an indoor [karting] track". One respondent advised not to forget:

• Marketing costs (as mentioned above) i.e google CPC, FB etc.
• Insurance costs. They can be eye watering and I expect Karting is seen as fairly high risk. I would expect it to be [GBP] tens of thousands per year.
• Business rates. Going to be a lot due to the physical size of place you will need.
• Staffing costs. Its only going to get more expensive. A junior manager will expect £25k a year these days, you will need 2 or even 3. A senior manager, who actually knows what they are doing, £40k+.
• Working 24/7 because unless you have a massive budget its likely you will have to oversee things from day one pretty much forever.
• The lengths at which the competition will go to secure their business.

Alansplodge (talk) 18:50, 25 January 2019 (UTC)

Renting go-karts might not be more expensive than renting automobiles. Time spent with automobiles might be a desirable thing but time spent with go-karts—beyond a limited point—might be an undesirable thing. The inbuilt assumption in this question is that renting go-karts is more expensive than renting automobiles. That might not be true. People might get sick of go-karts after 8 minutes. It may be the case that people desire no more than 8 minutes of go-karts. Bus stop (talk) 04:17, 26 January 2019 (UTC)

To phrase this in economics lingo, your assertion is the marginal utility of an additional unit of go-kart rental is less than that of an additional unit of car rental. If true, this means the rental business has to recoup its costs for each renter over a much shorter rental time, which would possibly explain the higher rate. Personally, on a vacation, I have no desire to use a noisy, uncomfortable, fume-belching go-kart, but may need, or strongly desire, to rent a car to travel. If others feel similarly, the demand for car rental will be greater than that for go-kart rental. Even someone who wants to ride a go-kart may need to also rent a car to travel: the former good cannot substitute for the latter. These factors place downward pressure on the price of car rental relative to go-kart rental. --47.146.63.87 (talk) 07:52, 28 January 2019 (UTC)

Anecdotally, for those that say that karts and rental cars are not very similar, there is some intersection. In Tokyo at least, you can drive a rental kart through the streets in a guided tour. You may compare the prices with circuit karts and conventional rental cars in Tokyo. --Error (talk) 18:40, 30 January 2019 (UTC)