Public Opinion is a Transaction Cost

Transaction costs are a rather nebulous concept in economics — they have many definitions and there is no single settled meaning. From a high level, transaction costs are simply barriers to completing mutually beneficial exchange. That is to say, transaction costs are those things that get in the way. If you want to purchase a bicycle, the searching process of finding a good bike and where to purchase it are transaction costs. So too would be the actual price of the bike, the travel associated with picking up the bike from a store, and, if your town has a law requiring you to wear safety equipment while riding, the cost of a helmet. These costs can be a distinct dollar value or not, but in either case, they impact every exchange and every negotiation. They affect firms and individuals and they can be both institutional (regarding the context and structure of the market) or internal (existing only within a given exchange).

Most research regarding institutional transaction costs has been justifiably focused on government and legal structures. The regulatory power of the government and the legal enforcement of property rights make up a large portion of the market context. The conditions and “rules of the game” that every person and firm are subject to if they want to participate in the market. These things impact not just costs and prices, but the type of transactions that can take place at all.

But the past few years have seen the development of a new, unexpected transaction cost — public opinion.

During the height of the COVID-19 pandemic, the US experienced shortages that many economists had not thought possible in a market-based system. Contrary to popular belief, these shortages were not due to supply chain issues. These shortages were due to public pressure on firms to not raise their prices.

Functioning market economies utilize surge pricing in the face of temporary supply shortages. When supply gets low, prices are raised so that only those individuals who are willing and able to pay this increased price are able to obtain the good. This is a temporary rationing system to maintain product availability for those who need or want it the most until more supply is delivered. This function plays out frequently after natural disasters (much to the chagrin of the non-economically minded).

When COVID-19 distrusted supply chains, firms should have responded by raising prices until the supply chain recovered. They didn’t. Instead, consumers and the government pressured grocery stores and other firms to maintain their prices at pre-COVID-19 levels, leading to the empty shelves we all witnessed that year.

On July 2nd, the Michigan House passed a bill enforcing ticket limits for things like concerts and other live events. The bill is dubbed the “Taylor Swift Bill.” Concert tickets are priced artificially low by the venue or artist. That sticker price is below what many consumers would be willing and able to pay for the ticket. This is simple supply and demand — when the ticket price is too low, it incentivizes individuals or firms to purchase multiple tickets and resell them on the secondary market for profit. There is profit to be made in ticket resale, if there weren’t, there wouldn’t be so many firms and individuals participating in the reselling of tickets.

Those tickets are priced so low because of public opinion. Artists need and want their fans to view them positively, their fans want cheap tickets. The optics of Taylor Swift charging hundreds of dollars for nosebleed seats prevent venues from properly pricing those tickets. Thus creating the secondary market where individuals and firms can profit by reselling tickets. That secondary market makes ticket acquisition more complex for fans, however, as it becomes more difficult to find grouped tickets through resale, there is a risk of ticket fraud, and it may take more time to locate desirable resale tickets. Taylor Swift fans would be better off if Ms. Swift simply charged market value for those seats. Instead, public opinion keeps prices artificially low, creating this secondary market where consumers are disadvantaged as the artist and venue fear public backlash.

Now, the state of Michigan is considering adding an administrative and compliance cost to that secondary market. Potentially allocating taxpayer dollars to the investigation and enforcement of ticket limits. Ticket limits that are only necessary because of artificially low prices.

The Biden-Harris administration has joined in on increasing administrative and compliance costs for live events. In its fight against “junk fees,” the administration is restricting ticketing firm’s ability to recoup a portion of the artificial consumer surplus — advertising a lower price only to add fees during checkout, effectively lifting the price closer to its true market rate. A surplus that, again, exists only temporarily and as a direct cause of public opinion.

Public opinion is a transaction cost. Firms are more responsive to the whims of the masses than ever before, now disregarding price signals and maintaining artificially low prices for the sake of PR. The Biden-Harris (now just Ms. Harris) campaign’s fight against “shrinkflation” was yet another indication of this. Rather than raising prices to account for inflationary losses, firms are accused of avoiding the PR hit by decreasing the size or amount of the good they sell.

This is all driven by public opinion. The public, not just consumers of a specific product, are impacting the wider economy through sheer force of will. Demanding firms disregard market signals on price and delay responses to shocks to their supply. Firms are obliging out of fear of retribution, incentivized to instead find loopholes to raise prices (hidden fees), government bailout funding (EIDL and PPP loans), or rely on other income streams (live event venues).

All of this negatively impacts the consumer through increased levels of risk (fraud in the secondary market), searching costs (time it takes to find a good or service), compliance costs (costs firms face to comply with regulations, then passed on to the consumer through fees), and a litany of other factors. These impact not just ticket sales, but all transactions, because public opinion is a market condition — it’s an institutional transaction cost. All firms, all industries, and all consumers are subject to “the public’s” opinion on what is right or just for a firm to charge.

And despite what “the public” believes, consumers are worse off for it.