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I'm Richard McKenzie. In the previous lecture, I took up several economic explanations that explain the prevalence of queues.

As noted, queues are something of a pro lem for economists, ut onl! ecause their suppl! and demand curve model of mark, competitive markets, suggest that those markets tend to clear onl! ! "a! of price movements. As !ou have learned under standard suppl! and demand curve anal!sis, if there is a shortage "hich can sho" up in queues then the market price "ill rise causing the qualit! demand to fall and the quantit! suppl! to rise until the shortage is eliminated and until the #s are eliminated. In that first lecture on queues, "e pointed out that queues can e partiall! explained ! the fact that man! markets are in continual fluctuation. $ith queues emerging from time to time if not constantl! ecause markets are processes, that take time to find their ever changing market clearing prices. And ecause, price hikes have, inherent, risk costs, for firms. In that prices can end up eing, too high "ith producers having unintended, unsold goods, that suggest missed sales. And lost merchandise especiall! "hen the merchandise is perisha le. $e also noted ho" rationing ! queues can e a more profita le usiness strateg!, than rationing ! price. %o" in this lecture I "ill extend the arra! of explanations for queues. &ho"ing ho" queues at, sa! grocer! stores can e mutuall! eneficial. 'o the stores and their customers. (rankl!, if queues "ere not mutuall! eneficial, it is hard to see ho" queues could e ever)present at grocer! stores and, for that matter other stores. If queues "ere not mutuall! eneficial, if shoppers didn't gain something on alance ! them, that is, ! queues, then there must e a profita le opportunit! for firms to exploit. &ome, entrepreneurial firms, "ould devise methods that "ill make shoppers etter off on alance. &a! ! increasing the num er of checkout counters. Raising prices and shortening the time shoppers spend standing in line, as "e "ill sho" in this lecture . (inall!, I "ill take up the logic of optimum queues. $hich is a useful construct, onl! ecause it "ill help us explain "h! queues var! in length. %ot onl! in terms of footage or count of

customers in line, ut also in terms of "ait time. *et's egin "ith queues. +rocer! stores and for that matter man! other stores are notorious for having long queues at their checkout counters at the end of most "orkda!s, sa! et"een five and seven p.m. $hen people drop in to u! their meals for that evening or "eek. #ueues are, common at, other times of, most da!s. &impl! ecause, at nonrush hours, grocer! stores regularl! close one, or several, of their checkout counters. ,ou have to elieve that, the stores must e seeking some mutuall! eneficial optimum queues at different times of the da!. -r "h! else "ould the! e opening and closing checkout counters. (or the fun off it. 'o make customers mad. 'hose knee /erk ans"ers don't seem to e reasona le to me at least not for profit making of firms. Again ack to the question at the heart of our last lecture or "h! queues. And "h! are cues as long as the! tend to e, and no longer, and no shorter. 0urrentl! mistakes in estimating store traffic, at various times of the da!, and in planning "ork schedules of check out clerks, explains some queues and their var!ing links. Instead of raising and lo"ering their prices, grocer! and other stores deal "ith the variation in traffic. "ith allo"ing their queues to lengthen and to contract. 1aving said that, ho"ever, oth shoppers and store managers must plan for queues "ith some expected or mean "aiting time. And I suspect that "hen !ou contemplate going to !our local grocer! store, !ou do so "ith some idea of ho" long !ou "ill likel! stand in line. Indeed !ou pro a l! often ad/ust the timing of !our trips to accommodate the different amount of time !ou expect to stand in line at different times of the da! and different da!s of the "eek. &hoppers and managers oth understand that cues can e longer than expected, ut also shorter than expected dur ing different times of the da! and different da!s of the "eek. If the cues are longer than expected. 0onsistentl! and persistentl! then shoppers can e expected to revise their expectations and ma! e shop else"here, "here their grocer! ills plus the opportunit! costs of their time "aiting in line is lo"er than else"here and ma! e the! "ill ad/ust the time that the! go to the grocer! store. Managers can e expected to ad/ust the num er of checkout

counters the!, have open to minimize the incentive their customers have for moving to other stores. 'he crucial point is, that man!, ma! e not all, persistent ques, must have a rational economic foundation, grounded at least partiall! in the costs and enefits of people "aiting. In queues. In planning their trips to grocer! stores, shoppers can e expected to "eigh off the enefits of getting the food items the! need and "ant against the prices plus the opportunit! cost of the time the! expect to stand in line. &hoppers should e "illing to pa! higher prices for the enefit of having to spend less, expected time, standing in line. At least, e!ond some point. And the! should e "illing, up to a point, to spend more time standing in line, ut onl! if the! are adequatel! compensated ! the store in terms of lo"er prices for the products the! u!. 1o"ever, as ehavioral economists have argued, man!, ma! e not all, consumers ma! tend to place a greater su /ective "eight on an out)of)pocket expenditure of a given dollar amount than on an equivalent opportunit! cost, also measured in dollars. If such is the case, and that is a ig if. 'his mean that shoppers can e expected to e "illing to incur more than a dollar in opportunit! cost "aiting in line to save a dollar on the prices of their food items. And stores should e expected to exploit shoppers differential "aiting of out of pocket expenditures and opportunit! cost of "aiting. In line. $ith the expected result eing that queues "ill e longer than the! "ould e expected to e if the shoppers do make dollar expenditure equal to a dollar of "eight. Moreover, store managers, and their executives and o"ners, can e expected to see queues, at their checkout counters, as an economic pro lem. And as a source of greater profiti ilit!. At least up to some point. &tore managers, also, should e expected to "eigh off the costs and enefits of having queues. 'he enefits of, to managers from eliminating queues are transparent. 'he shortening of the queues can make shoppers happier ecause their total cost of getting "hat the! "ant goes do"n. $hich means that shorter queues can increase store traffic and sales, and can raise the prices the stores can charge. 'he managers management pro lem is that cutting the length of queues is costl!. Managers "ould have to set up more

checkout counters. -pen more of them for more hours of the da!. And incur a greater "age ill for the greater num er of checkout clerks. 'he greater floor space used for the greater num er checkout counters is costl! ecause of the greater construction and land costs, and ecause the expansion of checkout counters "ill force the contraction or elimination of other product lines. In short, there are opportunit! costs involved in expanding the count of checkout counters. 'he managers must recognize that checkout counters are fixtures. 'he! can't e easil! and quickl! removed. 'hat is to sa! that man! checkout counters and the floor space under them can go unused for hours each da!, giving rise to a non)trivial special opportunit! cost "here land and floor space come at premium prices. %either grocer! store managers nor shoppers "ould likel! "ant zero queues if such "ere ever even possi le. %o queues at all means lots of costl! floor space eing taken up "ith man! check)up counter, so a num er of "hich "ould not e use during man! hours of the da!, if not da!s of a "eek. And no queues "ould likel! spell, high prices for shoppers. 2oth shoppers and managers are o viousl! interested in having queues of some optimum expected length. &tore manager can e expected to add checkout counters, so long as the! can raise prices on their 3roducts sold ! more than the rise in the cost of their additional checkout counters. And managers should e a le to raise their prices "ith more checkout counters ecause shoppers "ill spend less time in line. If the store can incur 456,666 for an additional checkout counter ut can increase their expected net revenues appropriatel! discounted for time and risks through higher prices and greater sells ! 476,666 then the managers should e "illing to add the check. 0heckout counter. -ther"ise, the! "ould e leaving 486,666 in added profits, on the ta le. Managers, ho"ever, are constrained in ho" man! checkout counters the! can profita l! add. Again, as the! add a gro"ing num er of checkout counters, the! "ill have to contract, or eliminate, product lines "ith gro"ing profita ilit!. In short, manager's costs "ill gro" "ith additional checkout counters. Moreover, as the! shorten their lines, managers lo"er the opportunit! cost of their shoppers. 2ut the! also have to

increase the prices in, on the products that their shoppers u!. 2e!ond some point the added prices paid ! shoppers in their grocer! ills "ill exceed the shoppers' falling opportunit! cost of standing in line, and as noted earlier, man! shoppers ma! have a preference for incurring a dollar of opportunit! cost over a dollar in out of pocket expenditures on food products. $hat this means is that the expected length of the checkout queues "ill never likel! go to zero, at least not for most run of the mill neigh orhood groceries stores. If the expected "ait time "ere zero, then managers "ould likel! see an incentive to take out checkout counters, save their store's cost, impose. -pportunit!, "ait time costs on the shoppers "ho can then see a reduction in their grocer! ills ecause of the shoppers' lo"er costs and prices. 1o" long should the queues e. 'he ans"er is, necessaril!, it all depends on the actual costs and enefits as perceived ! the stores and their customers 'o reiterate and impress o n !ou the economic "a! of thinking a out queues, managers need to manage the cost and enefits for oth their stores, and shoppers. As their queues are lengthen, the stores save cost, ut and the! can lo"er prices. &hoppers can earn, can incur more "eight costs. 2ut can enefit from lo"er prices. As the store, store takes out check)out counters one after the other, the stores cost savings from doing so are likel!, to fall. +iven that the store "ill likel! take out the counters, that are most costl! at the start, and then take out checkout counters that have progressivel! less cost. 'he price reductions, can as a consequence, e expected to fall as the queues lengthen. As the queues lengthen, shoppers "ill see the prices fall ! a smaller and smaller amount, at the same time their "ait costs egin to escalate. &ince shoppers can e expected to give up their least costl! opportunities "hen the! start their "ait, onl! to forego more and more costl! opportunites as the! "ait longer and longer In line. 'he store managers can e expected to allo" shoppers expected "ait times and the qeues to gro" so long as shoppers su /ectivel! "ait at opportunit! cost of the additional "ait time is lo"er than those savings on the prices of the things the! u!. &tore managers "ill "ork to avoid extending their queues until the

"ait time costs their shoppers incur is greater than the shoppers' perceived savings from lo"er prices. 'he central point of this line of anal!sis here is that there is some optimum queue for ever! store. $ith one important determinant eing the opportunit! cost of the store's shoppers. $e "ould tend to expect that stores that serve shoppers "ith relativel! high opportunit! costs "ill tend to have shorter queues at their checkout counter than stores that serve shoppers "ith lo"er opportunit! cost. 'hat's, this is to sa! do"n market grocer! stores in lo" income neigh orhoods for example (ood for *ess and (ood *ion grocer! stores common in the mid"est and south can e expected to have longer lines. 'hen up market, gr oceries stores in high income neigh orhoods. (or example +elson's, a high income almost outique, grocer! store chain in &outhern 0alifornia and concentrated in %e"port 2each. (or that matter, do"n market Marshalls department stores, "hich caters to predominatel! lo" income and price sensitive shoppers, can e expected to have longer lines than up market, outique "omen's stores, like 9. 9ill. $hich caters to much higher income and less price sensitive shoppers. 1ence, "e can predict that as "age rate rises across shopping areas, "e can expect that the checkout lines "ill shorten. And vice versa. In our discussion to this point, "e have focused on the logic of queues from the perspective of individual stores, or ho" the! can make mone! from queues, and on customers of identified stores, and ho" the! can save mone! from queues. If cues have the mutuall! eneficial effects "e've identified for stores and customers. 'hen those effects should sho" up in competitive market pressures for all stores to find their optimum cue. Again, if there are mutual gains, then stores that do not seek and hence, do not achieve optimum queues or some close approximation, "ill e at a market disadvantage. $hich can translate into their having higher costs and higher prices than their competitors. &uch stores "ill either have to shape up in terms of their policies to"ard queues, or face the prospects of eing "iped (rom the market. -r the prospects of eing ought out ! investors "ho "ill replace the old managers "ith ne" ones. And "ho "ill correct the store's policies on qeues.

After all, there is mone! to e made in stores moving as est the! can. in an imperfect "orld, $orld to"ard optimum cues. As !ou might have surmised, the competitive pressures that "e've identified can e clarified "ith suppl! and demand curve. %o" let me return to m! document camera that has the standard suppl! and demand curve graph that "e have used man! times, in past lectures. 1ere I have, the, our standard suppl! and demand curve graph. 'his is the deman d curve for, sa!, groceries, at, at, at stores "ithout queues. And this is the suppl! of groceries at those stores, "ithout queues. %o", let's suppose that stores can, in fact, have queues. 'hat is, the!, the! take out some of their checkout counters. And the!, the! save costs, in the process. If, in fact. 'aking out checkout counters is mutuall! eneficial. then "e should expect, the market suppl! curve to move out into a position like, &8 to &:. 'he distance. A2 "ill e an indication of the cost savings that firms can realize ! taking out some of their checkout counters, "hich means it's a cost savings from creating q's. %o", the taking out of the check out. 0ounters and lengthening the lines at the checkout counters can cause the demand curve for shopping at these stores to fall. And as a result the demand curve can go from ;8 to ;:. 2ut notice. 'hat the shoppers "ere once "illing to pa! a prices of c "ithout cues, no" the!'re "illing to pa! a price of d "ith, "ith cues. 'he price that the!'re "illing to pa! goes do"n. 2ut notice that the cost savings over here, a to the suppliers is going to e greater than the cost incurred ! the shoppers "ho had to stand in line from the queues. And this a must e greater. then the cd. If, indeed cd "ere greater than a then there'd e no mutuall! eneficial, q and as a result, "e "ould not have q's eing created. 2ut "hen, in fact, a is the cost savings to grocer! stores is greater than the cost incurred ! shoppers "ho are standing in line.$e should expect the q's to occur. %o" "e have a ne" equili rium here. It's going to e equal to, price 3:. $hich means that the quantit! supplied -n the market is gonna e #8. 'he quantit! demanded, I mean #:. 'he quantit! demanded is going to e, #<. As a result of the price falling. from 38 to 3:, "e have a shortage in the market. 2ut this does not

mean that the shortage is someho", ad. (irst off, it's not reall! a shortage in !our standard, sense. It /ust means that "e have a queue, that emerges in the market. And this queue can e sho"n to e mutuall! eneficial. It's o viousl! eneficial to the stores. 2ecause the stores have a cost savings equal to A prime 2 prime. And this cost savings, A prime, 2 prime from here to here, is going to e less than the reduction in the price. &o the stores gain, from, from these q's. 2! the same token, the consumers have a price reduction equal to 38 to 3: ut their cost of standing in line is going to e equal to c prime, prime. &o the consumers get a lo"er price, get a greater price reduction than the! incur in terms of total cost. &o "e reall! have a market clearing here. It appears as though there's a shortage, it appears as though the cues might e inefficient, ut their not inefficient at all. 'he market is reall! clearing, ! a trade off of, of time and, and prices on, on, on product. -ver the past t"o lectures, that is the last one and this one, I have taken an extended tour through the logic of cues. I have done this, ecause the explanation for cues are varied, and ecause the explanations revere much a out ho" economist think, and ho" the economic "a! of thinking can unravel the m!steries surrounding "hat real "orld managers do, and must do In competitive markets. 2elieve it or not, there is much more, that, could e said, a out the economic $e also have not een a le to take up the issue of "h! some "hen !ou sa! universal studio parks have premium prices #, = or made shorter ! the added price and "h! other venues again Al ertsons do not use the same strateg! for at least one of their check out counters that is "h! does an Al ertsons have a check out counter that. Imposes an added fee in order to go through that checkout counter. >niversal &tudio, essentiall!, does that. $e have not covered these topics ecause frankl!, there are real economic limits, costs and enefits, to the attention given to queues and this lecture series. If !ou are interested in these topics, ho"ever, I suggest that !ou spend some time thinking a out them. 'r!ing to come up "ith !our o"n resolutions of "hat mi ght e considered puzzles. -ther"ise, I have covered these issues and other issues on

queues plus all the issues covered in, in m! t"o lectures on queues. In a ook on "h! popcorn costs so much at the movies, and other pricing puzzles. (or no", I am pleased !ou have een "ith me. .