Thursday, 8 January 2009

I need an economist

In an interruption to your regular service, a small plea for help.

I've written an article for an upcoming 'The Amateur' column on GameSetWatch, and I need someone with an economics background to sanity check it.

In case you're wondering, I'm an enthusiastic amateur when it comes to economics (which is why Prince Charming revolved around financial arbitrage) but I've never had any conventional training in the subject beyond a 1st year university paper.

The column will be on why it is rational to pay for something even when you can get it for free. As a part of that, I make some statements around why people start companies, for which I've not seen the conventional economic explanation (I've seen plenty for why people continue to run companies, but not why they start them).

Here's the scenario, restated slightly:

Ten people want to have a party, which will cost them a total of $1000. How should they apportion the costs?

The answer appears to be split 10 ways (another to weight it based on the relative pleasure they'll derive from the party).

However, one of them comes up with the idea of selling tickets to the party at $20 dollars each. That way, each person only has to pay $20, instead of a higher amount, and they only have to find another 40 people to pay for the costs.

How many of the ten people does it make sense to start the 'party company' with, which will sell the tickets and pay for the party?

One argument is that all 10 people should join. Because in this instance, they only have to sell one more ticket to be better off then when only 10 people were paying for it.

My questions are: Why should a person choose not to join the party company? What possible benefit do they derive from allowing the party company to make a profit, and how does this relate to why you should pay for something when you can get it for free?

(I've got the answer, I think, and hopefully I've piqued your interest. More importantly, the answer still makes sense even when the number of attendees is known in advance).

3 comments:

Swift Voyager said...

First, you'd set up shares based on portions of the $1000 startup cost, say 10 shares for $100 each. Then the original 10 people can elect to buy any number of shares they want, just so long as all 10 shares are sold. Otherwise you don't have the funding to have a party. Then the original people become paying customers of the party company and they each must buy a ticket at the regular price. After all tickets are sold, the revenue from ticket sales is divided amongst share holders by proportion. If 35 tickets are sold, then the shareholders pay $20 just like everyone else. If 36-39 tickets are sold, then they pay less than $20 each. If 40 tickets are sold, then the shareholders get to party for free, and if more than 40 are sold then they make money and get to party too. Shareholders who contributed the most would benefit the most, and vice versa.

Swift Voyager said...
This comment has been removed by the author.
Swift Voyager said...

Erm, I meant 50 total tickets, so add 10 to each of the numbers of tickets in my example. oooops.