March Madness and Oskar Lange

We know it’s the middle of March when the rambunctious sports fanatic perks up and invites everyone in the office to “fill out their bracket” and put some money on it.This can only mean one thing– March Madness is here! In the doldrums of winter, I always appreciate the burst of energy that comes along with some friendly competition as week-by-week one person’s bracket rises above the rest.

If you’re lucky to be located close enough to one of the games, you may be able to watch the “madness” in person. Of course, that’s only if the price is right. Right now, the cheapest tickets for the final championship game are going at $156 a head. While I enjoy a good basketball game, at that price, I’ll opt to watch from my couch, with my biggest expense being the drinks that I picked up. Of course, I’m not everyone. Some people will choose to pay that high price to be able to witness the game in person. And that’s the brilliance of markets– in most cases, I will only buy a product if I determine that it is worth its price.

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Oskar Lange, a Polish economist alive during the early 20th century, theorized about how to solve the problem of pricing. As a socialist, he believed that the government should centrally organize the market, setting the price of goods and services. Unfortunately for those devoted to socialism, this set-up creates a coordination problem– how does the government know how much you or I are willing to pay for each and every item we purchase? This problem, known as the socialist calculation debate, was of great concern to economists of Lange’s era, sparking a flurry of debate trying to solve the problem of how to set a price without a market.

Lange proposed an innovative solution: nationalize production and price-setting,  and let the private market handle distribution. Then, if the set price resulted in shortages or surpluses, the government would adjust the price accordingly. By experimenting with the price this way, Lange theorized that the government would eventually be able to a set a price that reflected what consumers were willing to pay.

Unfortunately, when put into practice, this theory fails in its mission to find the optimal price. To illustrate, let’s take a step back and apply this to March Madness tickets.  Let’s say one of the basketball player’s grandpa is buying tickets to a game. They might be willing to pay extra money to get in and see Jonny when he gets his free throw. The basketball enthusiast, however, has a less flexible budget. She would like to go, but is not willing to pay as much as grandpa for the same seat. Fortunately, both grandpa and basketball enthusiast have options. They can choose from multiple ticket vendors such as StubHubb, Ticketmaster, the NCAA, and college campuses. Each of these vendors can charge a slightly different price, making it possible for both grandpa and basketball enthusiast to pay to see the game.

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Now, imagine the NCAA was the only one able to sell tickets for March Madness. Maybe the price for tickets is somewhere in the middle between what Grandpa and the random basketball enthusiast are willing to pay.  In this world, though the random basketball player would like to see the game, there is not a ticket available at the price she is willing to pay. Though the NCAA may drop the price by a bit, they may not reach the threshold at which she is willing to buy a ticket, not realizing that our basketball enthusiast is even interested.

Fortunately, Lange is not in charge of March Madness. With many many vendors offering tickets at different prices, they success of failure of a company at meeting consumers needs will determine how well they are meeting the market’s needs.

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