Everyday Economics

Sell Me a Story

Two skyscrapers, built at the same time in the same block. One’s much taller. Why? 

The curse of thinking like an economist is that you’re perpetually baffled by things that everyone else finds completely obvious. Why, for example, is it nearly impossible to get tickets for a hit Broadway show like The Producers? Obviously, it’s because that’s the show everyone wants to see. But to an economist that’s no answer at all. The Producers is not only the most popular show in town, it’s also (at $100 for an orchestra seat) the most expensive. Why doesn’t the price drive away enough customers so that I can get a ticket?

Again, there’s an obvious answer: This show is really, really hot. But if it’s so hot, why isn’t it even more expensive? Surely the producers of The Producers (unlike the producers inThe Producers) are not out to avoid making money. If they predictably sell out at $100 a seat, why don’t they charge $150 or $200 or whatever it takes to reduce demand down to the theater’s capacity?

More generally, why are hit shows consistently underpriced (in the sense that the demand for tickets exceeds the supply) while less popular shows are consistently overpriced? And not just on Broadway, either: At the other end of the theater spectrum, we have the nearly 200 shows in the New York International Fringe Festival, where this year’s hit was (predictably) the stage adaptation of the porn classic Debbie Does Dallas, with every performance sold out before the curtain went up on opening night. Meanwhile, dozens of other festival offerings played to half-packed houses. Why didn’t it occur to anyone to raise the price for Debbie and lower the price for some of the other shows until attendance evened out?

This kind of thing gets more baffling the more you think about it, and economists spend all their time thinking about this kind of thing. That’s why so many of us have that strange, bewildered look in our eyes.

You don’t have to be an economist to think like one. TorontoStar reporter Jason Brooks surely carries the gene for economic curiosity. Brooks wrote me last month with a question that’s been plaguing me ever since, namely: Why aren’t all buildings the same height? Well, OK, I understand why my house is shorter than the Empire State Building. But it’s much harder to understand why the Empire State Building is so much taller than anything else in Midtown Manhattan. If it was a good idea to make one building 102 stories high, why wasn’t it a good idea to make the neighboring buildings—at least those that were being built around the same time and for the same purpose—102 stories high as well?

Presumably the optimal height of an office building depends on things like land prices, the cost of adding additional stories, and the nature of the rental market. How could that calculation have turned out so differently for one office building than for another being constructed in the same neighborhood in the same year?

Taller buildings cost more per story than shorter buildings. So if Jack plans to put up a 40-story building while Jill plans to put up a 60-story building across the street, here’s how they can both get richer: Jack builds 50 stories instead of 40, Jill builds 50 stories instead of 60, and Jill buys the top 10 stories of Jack’s building. It’s cheaper for Jill to put her top 10 stories on Jack’s building than on her own, and they can negotiate a price that lets them share the savings. So why don’t they do it? Why doesn’t that kind of bargaining cause all buildings to be the same height?

You could try making the same argument with houses: Instead of my three-story house and my neighbor’s five-story house, we could have two four-story houses, and my neighbor could own my top floor. Well, that’s clearly no good because I don’t want strangers—or even acquaintances—traipsing through my house. But in a large office building, you’re sharing with hundreds of strangers anyway, so the objection washes away.

It’s no use arguing that some builders can’t raise enough capital to build more than, say, 40 stories. That only raises the question of why those builders aren’t driven out of the market by those who can raise more capital.

I’ve spent the past month running the building-height question past a bunch of economists, and I’ve heard a lot of creative theories, but none of them survived much scrutiny. In desperation, I put the question to Michael Raymond Feely, a Boston architect who is actually an expert in the subject at hand. Asking an expert is something economists are generally loath to do, on the grounds that people who spend all their time thinking about, say, architecture, are unlikely to have thought very much about economics. (Try, for example, asking a theatrical manager why tickets for The Producers are not more expensive than they are; my experience tells me you’ll get gibberish every time.) But Feely turned out to be more thoughtful than the average expert. He gave me not just one but two responses that actually seem to answer the question.

First of all, it’s not always true that you can reduce costs by equalizing building sizes. Here’s why: Even though very tall buildings cost more per story than very short buildings, the cost does not increase continuously as you add stories. Instead there are sudden points where going up only one more floor dramatically increases the cost. Some examples are four stories (you can really only go three stories with wood-frame construction), seven stories (kicks in additional requirements for being a high-rise in most jurisdictions), and 15 stories (wind and seismic bracing start to get much more complex around this point). So in between, say, seven and 15 stories, there’s no real advantage to equalizing the heights of two buildings; an eight-story building and a 12-story building cost about the same as two 10-story buildings.

Second, some tenants—but not most tenants—are willing to pay a premium for either the exclusivity of a short building or the extra amenities (newsstands, restaurants, health clubs, observatories, and prestige) of a tall building. Therefore it can be profitable to put up a few of those unusually sized buildings, even if their heights fail to minimize construction costs.

And there you have it. Hats off to Mr. Feely, thanks to whom I can sleep again at night—just as soon as I figure out this whole ticket-pricing thing.