Thursday, April 16, 2009

The Economics of Volcano Climbing

So I recently hiked up a portion of the Volcan Pacaya and I noticed something interesting. The hike begins at a small town (if you can even describe it as that), a goodly portion up the hill, about two miles and 500m from the outlook near the top of the volcano. At this base are assorted locals selling water, snacks, food, etc., as well as children renting walking sticks and slightly older folk offering mule rides to the top of the hike. The price at the bottom for the mule was 50 quetzales; since we were there to hike, we opted for 2 walking sticks at 1/10th the price.

When we began up the hill, I was surprised to look back and see that two of individuals offering mule guides were leading their mules up the mountain behind us, without riders. The idea is that since the walk was pretty directly uphill, people would get tired and want a mule to complete the journey. This must happen with a frequency signficantly greater than 0%, or else this practice would prove fruitless--and tiring to boot.

Since we stopped a few times on the way up, and the mule guide stopped with us, the economist in me got to thinking-- I wonder how the price changes on the way up the hill. So every time we stopped, I asked him what the price was at that point in time. As it turned out, the price never changed from 50 quetzales.

Now, it could well be that the individual never wanted to change the price. Or, perhaps there was a different range of negotiation to be had at different points, but he never strayed from starting at 50. Fair enough. But there are a lot of factors that could go into the price of the mule on the way up the hill; perhaps they all balanced out over the course of the walk. Consider:

- Does his willingness to supply the mule change on the way up the hill? This is interesting. He's already committed the mule to going up the hill; if there's an exhaustion factor, perhaps he'd be willing to accept a lesser amount (as anything above 0 rewards the trip up to some degree). It's tough to think of a scenario where he'd only be willing to accept more-- maybe if the mule goes faster than a hiker, and since he committed the mule to the slower hiking group, he'd want more money to offset the longer time committment of the mule to a half-hike/half-mule trip up the volcano?

- Does our willingness to pay for a mule change on the way up the hill? Perhaps, but it's tough to tell which way that could affect the price. Would I want to pay less since the ride wouldn't be as long? Would I want to pay more since I have committed to the hike and wouldn't want to turn back if I could only go halfway?

- He is offering us a service by following us up the hill; after all, if I slipped and broke my leg, I'd want to be taken down the hill as quickly as possible. His decision to follow us up the hill is an insurance policy, of sorts, provided for us free of change.

Anything else? Again, I won't disagree that he decided to keep the price at 50 for ease. But then again, it's nearly costless to change the price and bargaining is in play here. Besides, it's more fun to consider the possibilities anyway.


Justin M Ross said...

It must be important for his business model that he credibly commits to a price. It reminds me a lot of how the retail price of John Madden football never changes until the newest version is released.

Matt E. Ryan said...

I'd agree, but does he have a lot of repeat business? How do I know if he commits to 50 for the next 5 weeks, or if he only gave that price to me? If he gave me a break at 40, does that affect the perception of the next transaction? Presumably, each transaction is informationally isolated from the last.

Perhaps he and his fellow mulemen stick at 50; granted, the incentive is to shirk, but perhaps there's some sort of ostracism that emerges if someone deviates from the group agreed price.