Freakonomics Radio - 278. Chuck E. Cheese’s: Where a Kid Can Learn Price Theory

Episode Date: March 9, 2017

The pizza-and-gaming emporium prides itself on affordability, which means its arcade games are really cheap to play. Does that lead to kids hogging the best games — and parents starting those infamous YouTube brawls?

Hey Levitt, you ever go to a Chuck E. Cheese with your kids or maybe on your own? Well, you can't go on your own. They won't let you in if you don't have kids. Is that true? It is true. I'm happy to say I didn't find that out the hard way. I didn't actually show up at a Chuck E. Cheese without my kids. But I have heard that they will not let you in without children. So you've been with children? I have. It's been a long time. But in the day, I used to take my kids there. And you know me, I like the simple things in life, and that means I love places like

Chuck E. Cheese. I just love arcade games. They are fun. They're a great mix of manual dexterity and a little bit of thinking. And have you ever become violent at a Chuck E. Cheese because someone else's kid wouldn't get off the skee-ball? Yeah, I can proudly say I have never become violent at Chuck E. Cheese because someone else's kid wouldn't, you know, get off the ski ball? Yeah, I can proudly say I have never become violent at Chuck E. Cheese, never been tempted towards violence at Chuck E. Cheese. That's Steve Levitt, my Freakonomics friend and

co-author. He's an economist at the University of Chicago. Chuck E. Cheese, if you are not familiar with it, is a popular family entertainment spot with pizza and arcade games. Chuck E. Cheese's, where a kid can be a kid. I was asking Levitt about the potential for violence at Chuck E. Cheese, which officially is Chuck E. Cheese's Possessive, but most people shorten it to Chuck E. Cheese or Chuck Cheese, because that's what a Freakonomics Radio listener had asked us about. I'm not the type of guy to hit somebody and certainly not a child, but it led me to kind

of think it did seem plausible. Today on Freakonomics Radio, we ask a simple question. How does the price of a good or a service affect consumer behavior? Our cast of characters include our economist. Okay, so the one thing I want to get across is the idea about rivalry. Our listener. Do I personally feel okay with that? No. We hear from the founder of Chuck E. Cheese. It's an interesting theory. The current administration of Chuck E. Cheese. The first thing I'll say is incidents at Chuck E. Cheese's are very rare.

We hear what happens when things go wrong at Chuck E. Cheese. What happened is they began pushing and shoving the police officer. We ask, what's price got to do with it? I think it certainly could be. And we hear Steve Levitt's brilliant idea for testing this theory. Maybe I could dress up as a child. You could be the adult. And then we could see how many other parents, if I monopolize a game, end up attempting to beat you into a pulp. From WNYC Studios, this is Freakonomics Radio, the podcast that explores the hidden side of everything.

Here's your host, Stephen Dubner. So, Levitt, I've often heard you say that the one thing that economists are reliably fairly good at doing is setting the appropriate price of a good or service. Can you explain briefly in your economist speak how you do that? So essentially, the art of setting prices is simply figuring out what price to set so that you have the marginal cost of providing that good equal to the marginal revenue generated by the sale of that good. So the danger of setting a price too high, if you're selling, would seem to be obvious, right? People don't buy what you're selling. But what's the danger of setting a price too low? The danger of setting a price too low,

of course, is that too many people want to consume the good. If it's a kind of good where someone takes it and walks out of the store, then you'll find that the shelves are empty. In the case where it's not something we actually take out of the store, but instead something you experience, then what you end up having are long lines of people, all of whom want access to that same good, but only a few of whom can actually consume the good. We've talked a lot on this program about how price affects behavior. For instance, one of the most effective tools to cut smoking, price and tax hikes. What we know is that if you increase the price by 10 percent, you will decrease total cigarette

consumption by three to four percent. But what about when prices fall? The price of food has generally fallen over the past few decades, which makes it easier for people to eat too much. When the price of gasoline drops, people tend to drive more, which leads to more congestion, pollution, and crashes. If you own a bar and you suddenly drop the price of all beverages from $5 to 5 cents, how do you think that's going to work out?

So the relationship between price and behavior, especially bad behavior, can be pretty strong. And that's what led one Freakonomics Radio listener to put two and two together and come up with a theory. My name is Nathan Corey, and I'm a financial advisor in Milwaukee, Wisconsin. Corey used to go to Chuck E. Cheese when he was a kid. His experiences were always very positive. Oh, yeah, very positive. Yeah, absolutely. Now he's got kids of his own.

I've got two sons. One is about three and a half, and the other is four months. So he thought about taking his older son to Chuck E. Cheese, but he was also a little wary because of something he'd seen on the news. Certainly in the Milwaukee area for the past few years, there's been reports of violence always coming up in the news at Chuck E. Cheese locations. Violence at a restaurant chain that caters to little kids and their families? Yes, indeed.

If you just Google Chuck E. Cheese and fight, you'll find plenty of videos like this one. And like this one. And like this one. Now, we should point out, it's the adults fighting, not the kids. We should also point out that the adults may have been drinking. Because most Chuck E. Cheese's serve wine and beer. Yeah, it strikes me as pretty odd. Now, granted, we're in Wisconsin where we, you know, would drink beer at church if we could.

Anyway, when Nathan Corey decided to bring his young son to Chuck E. Cheese for the first time, he wanted to minimize the chance that he would encounter any violence. We went right when it opened in the morning. So we were literally the only people in the whole place. They had a good time playing the arcade games. And what I noticed right away after playing a couple of games with my son was that every machine in Chuck E. Cheese cost just one token. Even the games that lasted the longest, it seemed like they should have been more expensive.

And that really struck me as being kind of odd that there was no price variance between the games. You know, this was a subject of debate. That's Nolan Bushnell, who founded Chuck E. Cheese 40 years ago in San Jose, California. The debate was whether to make some games more expensive than others. We felt that since most of our revenue really came from kids under eight, I felt that it would be confusing. And we tested a few things and we found that it really didn't change the revenue that much. What you're assuming is that we'd make more money if we charged more. It turns out that that isn't the factor.

Before Chuck E. Cheese, Bushnell co-founded the video game company Atari. Chuck E. Cheese was a way to maximize his profits from popular games like Pong. Well, in the case of Pong, it was such a hit that you'd sell it for $1,000, and in its lifetime, it'd make $30,000. It didn't take rocket science to say, hey, I'm on the wrong side of this equation. I shouldn't just be selling the machines. I should be operating the machines.

So we were basically a Silicon Valley startup, and we're going to be celebrating our 40th anniversary in May of 2017. That's Michael Hartman. And I'm the chief marketing officer at CEC Entertainment. CEC Entertainment being the parent company of Chuck E. Cheese. Today, CEC is owned by a private equity firm called Apollo Global Management. It's planning an IPO for Chuck E. Cheese later this year. And was Chuck E. Cheese one of the first what are now known as family entertainment concept companies where, you know, kids and parents come together to do stuff, have fun, play games and eat? Absolutely. We were definitely one of the first family entertainment concepts. If you look back, you know, in terms of what the competition and the landscape was in 1977,

it was bowling alleys, dingy arcades, and movie theaters. And what Nolan wanted to do was to make video games more accessible to families and to younger children. Part of that accessibility is affordability. Our guest is very price conscious, and so we want to make sure that they can have an excellent experience for a family of four Part of that accessibility is affordability. Our guest is very price conscious. And so we want to make sure that they can have an excellent experience for a family of four starting at about $30. Which means keeping the price of games low.

The price varies a bit depending on what kind of package you buy. But rule of thumb, each token costs only about 20 cents, which, believe it or not, is what it cost to buy one Chuck E. Cheese token 30 or 40 years ago. So if you're ever looking for a part of the modern world that is somehow untouched by inflation, there you go. Chuck E. Cheese game tokens. And as Nathan Corey saw when he took his young son there. Every machine in Chuck E. Cheese cost just one token. Now, that's not quite accurate, and as we'll hear later, change is afoot. But here's what happened the next time Corey took his son to Chuck E. Cheese. It was a Saturday.

So as we were there, it started to get more and more crowded, and we didn't kind of have that free reign of being able to go and play any game we wanted without waiting. And I was in line with my son. We were going to play one of the smaller basketball hoop shooting games. And there were two kids in front of us that were playing that game. And they were just feeding tokens and, you know, not giving up their turn. And so as I'm seeing them feed tokens in the machine, I'm thinking, wow, it's costing nothing to do that. And that was kind of the aha moment of this is the problem with the pricing model. And this could be one of the unintended consequences.

The unintended consequences that Corey was thinking about were the fights he'd heard about on the news. Chuck E. Cheese chain markets itself as being a fun and safe place for your children. Chuck E. Cheese seems to have a history of violence nationwide. Earlier this year in Connecticut, a dozen adults were caught on camera throwing punches. Nathan Corey wondered if the fights he'd heard about were perhaps the unintended consequence of Chuck E. Cheese's pricing structure. The games were so cheap to play that you could just camp out for hours at your favorite game and choke off access to everybody else, which could lead to trouble. Well, I'm not the type of guy to hit somebody, and certainly not a child.

But it did seem plausible that somebody might start talking to the kids, and the kids maybe go get their parents, and an altercation would start that way. Or certainly if it was among just adults. You know, if you were there later on a Saturday, and everybody's drinking beer, and you're trying to play the basketball game, and there's, you know, a line

of adults waiting. I asked Steve Levitt if he could imagine that the Chuck E. Cheese pricing scenario encouraged violence. Well, I absolutely could imagine it because when it comes to Chuck E. Cheese and the product they deliver, they suffer from a very intense form of what economists call rivalry, meaning that exactly one person can play a particular game at a time. And when people all want the same thing, there are lots of different dimensions on which they can compete for that thing. And certainly physical violence is one

we see. I mean, I've studied drug dealing a lot. And indeed, when it comes to the pursuit of property rights in drug markets, violence is the strategy of choice. Now, I have to say I'm a little bit skeptical in thinking that when it comes to cues at the Chuck E. Cheese, that violence is usually the likely weapon to which rival parents might turn. So you're saying that Chuck E. Cheese customers are probably not as prone to resort to violence as crack dealers? Well, I think if the stakes were as high, they probably would resort to violence in the same way that the crack dealers do.

But when you have something inherently low stakes, like whether your kid can play game A or game B at Chuck E. Cheese, I would think that most parents, even most inebriated parents, wouldn't come to blows. Coming up on Freakonomics Radio, who's right? Our economist Steve Levitt or our listener Nathan Corey? And how are we going to figure it out? But first, a few fun facts about Chuck E. Cheese, courtesy of Chief Marketing Officer Michael Hartman. One. 90% of families with a kid three to eight

within 15 miles of a Chuck E. Cheese has come, and approximately half of those have come in the last year. Two. On average, a kid requests to come to Chuck E. Cheese's 11 times a year, and the parents let them come about three times a year. Three. When you look at a Chuck E. Cheese's 11 times a year, and the parents let them come about three times a year. When you look at a Chuck E. Cheese consumer, we are definitely middle America. We are a $50,000 to $75,000 income, but we have more people below $50,000 coming to our stores than above $75,000.

One more thing before the break. I'd like to give a quick shout out to all the public radio stations around the country who now play Freakonomics Radio. We realize your airtime is incredibly valuable and we're delighted you share it with us. So thanks. It's an interesting theory, is it not? That Chuck E. Cheese, the pizza and gaming emporium, prices its games so affordably that it's easy to hog any one game for hours, potentially leading to arguments that could potentially lead to violence. That, at least, is what Nathan Corey, a financial advisor in Milwaukee, was thinking.

There certainly is evidence of the violence at Chuck E. Cheese, and I was actually aware of that before we ever went with my son. Now, given what we know about priming and how the human mind works, you might suspect that if a guy like Nathan Corey took his son to a Chuck E. Cheese thinking about the potential for violence, he might have been more inclined to look for a causal explanation for the violence he'd heard about, as he told us earlier. Certainly in the Milwaukee area, if there's been reports of violence, always coming up at Chuck E. Cheese locations.

There are three Chuck E. Cheeses in the Milwaukee area. About a decade ago, after pressure from city officials, they all stopped serving alcohol to cut down on violence. Even so, the disturbances continued, which led Corey to think that maybe the pricing strategy, even more than the alcohol, was the culprit. Sometimes violence can really get out of hand. Consider the Chuck E. Cheese in Oak Lawn, Illinois, just outside of Chicago. I personally, with my children and family, have never experienced what I've seen has occurred here in Oak Lawn. That's Larry Deachen, the village manager of Oak Lawn. Over the past five years, the police responded to more than 300 calls at the local Chuck E. Cheese and made dozens of arrests.

In one case, there was a shooting in the parking lot. In another, an Oak Lawn cop got dragged into a fight. Our officer observed a fight in progress, identified himself as a police officer, and gave him the command to stop the fight. Instead, what happened is they began pushing and shoving the police officer, resulting in a call for an officer in trouble. Deachin says he spoke with Chuck E. Cheese executives and that the president of its parent company, CEC Entertainment, even flew out to attend an Oak Lawn Village board meeting to come up with solutions. There was a series of progressive, proactive steps taken.

The company paid to have two off-duty police officers at the Oak Lawn Chuck E. Cheese on weekends. And they tried some other things. They repositioned the games, actually removed some of the games to provide less crowding conditions. We were going to revoke their liquor license, and they voluntarily decided to forego their liquor license. So was that the end of the trouble? Well, unfortunately, the disturbances did not end. After another shooting late last year, this one involved a family that had just driven away from the Oak Lawn Chuck E. Cheese, CEC Entertainment announced that it would close that location. So if you pay attention to these reports of violence at Chuck E. Cheese, as Nathan Corey did,

you might get the impression that violence at Chuck E. Cheese is a common thing. But is it really? The first thing I'll say is incidents at Chuck E. Cheese's are very rare. Michael Hartman, again, the chief marketing officer for CEC Entertainment. You know, we believe that it makes for a greater soundbite to talk about an incident at Chuck E. Cheese's versus anywhere else just because of what our name connotes to folks. But if you think about ball fields and anywhere else where parents and kids are, you'll hear a lot of talk about those kinds of things as opposed to anywhere else. That makes sense, doesn't it?

A fight at a family entertainment place is just incongruous enough that when it does happen, it's more likely to show up on the news or in your Facebook feed than a fight in a ballpark or in a bar. On the other hand, Nathan Corey's theory that Chuck E. Cheese's pricing strategy could be a contributing factor to the fights that do happen? Well, even Chuck E. Cheese founder, Nolan Bushnell, wouldn't rule it out. It's an interesting theory. I think it's something that should be tested because it is, in fact, the hogging of a game causal. I mean, many of the games are two minutes. And so if somebody's got 10 tokens, it's 25 minutes.

That's probably too long and that could be a problem. But I didn't necessarily get that as the causal nature of their fights. Okay. So how should the theory be tested? You could try to run some experiments. Steve Leavitt again. You know, you and I, Dubner, could go down and figure out what the most popular games are. And maybe I could dress up as a child.

You could be the adult. And then we could see how many other parents, if I monopolize a game, end up attempting to beat you into a pulp. I appreciate you're making me the one that gets beaten. But on the other hand, I think the likelihood of me being beaten is low enough to enjoy the novelty

of seeing you dressed up as a child, whatever that means. So I'm okay with that experiment. In the end, we opted for something a little less dramatic. Here's our senior producer, Christopher Wirth. If Nathan Corey's theory is true, that prices may contribute to some of the violence at Chuck E. Cheese, then theoretically, we should see less violence at Chuck E. Cheese, then theoretically we should see less violence at similar entertainment chains that do charge more for more advanced games. For example,

Corey suggested Dave & Buster's, a chain that is more oriented for adults than kids, but does serve food and beer and wine, and it has a big arcade area where the games do not all cost the same. Each of the games has a different price that it costs to play. So from what I could tell anyway, seems to kind of control the demand for the games because you're not going to just keep playing the best games over and over again because you'd go broke. I went to Dave & Buster's just to check it out.

They've got Jurassic Park, they've got Kung Fu Panda, they've got Ghostbusters. Instead of tokens, customers purchase electronic payment cards. Those are then loaded up with chips that are used to play games. Nolan Bushnell, the founder of Chuck E. Cheese, has paid close attention to this industry. And he says Dave & Buster's payment cards allow the company to observe player behavior and make small, incremental changes to game prices. Some games cost 2.6 chips, for example, or about 50 cents. Some games cost 13.6 chips, close to $3.

Dave and Buster's, they implement variable pricing extremely scientifically. I have a lot of respect for their analytical ability. What we decided to do is collect police data on the number of violent incidents at Chuck E. Cheese and then compare them with Dave and Buster's. And we should say from the start, the method we're using here is highly imperfect. For one, we're not controlling for neighborhood characteristics or anything else. This is just raw data and spotty data at that. We focused on three large metropolitan areas, Chicago, Phoenix, and Dallas-Fort Worth. Oh, hi. I'm trying to reach a media relations person for

the police department in Great View regarding a records request for the Phoenix Police Department. We'd like to obtain a list of calls for service to a specific business address, the Chuck E. Cheese. Let's start with the Chicago area. There, we looked at the 13 Chuck E. Cheeses and four Dave & Buster's located within the broad boundary that we drew around the city. We asked for five years' worth of data on what are known as calls for service, which are these long lists that catalog each time a call came in,

whether it's for a fight or a false burglar alarm. We tallied up all the assaults, disturbances, battery charges, etc. And what we found is, as a monthly average, there are slightly more violent incidents at Dave & Buster's than at Chuck E. Cheese. The data showed one incident occurred at a Dave & Buster's roughly every two months versus one incident every three months at a Chuck E. Cheese. And we found similar results in Dallas-Fort Worth. On average, the rate of violent altercations and similar types of incidents was higher at Dave and Buster's. In Phoenix, they were roughly the same.

But that doesn't necessarily mean Nathan Corey's theory is wrong. As Nolan Bushnell points out, and as we freely admit, this evidence is far from definitive. I think that you're almost comparing cheese and chalk. Not only does Dave & Buster's clientele tend to be older, it stays open later. And while some Chuck E. Cheeses serve beer and wine, Dave & Buster's has a full bar. The amount of alcohol all by itself changes things tremendously. We wanted to find a company that's a closer match to Chuck E. Cheese, and that's when we discovered another pizza chain for kids called Peter Piper Pizza. At Peter Piper Pizza, you don't need a lot of dough to afford a pizza.

A large cheese pizza is only $3.50. Pizza. Peter Piper Pizza was founded in Phoenix. And like Chuck E. Cheese, tokens there cost just 20 cents each if you have a coupon. But unlike Chuck E. Cheese, it prices its games from one to four tokens, according to how advanced the games are. Plus, Chuck E. Cheese's parent company, CEC Entertainment, acquired the chain in 2014. The demographic is almost identical, with the exception that Peter Piper Pizza tends to skew a little bit lower demographically in terms of income. We collected 10 years' worth of police data. In the Phoenix area, we looked at 11 Peter Piper pizzas and five Chuck E. Cheeses. But again, the numbers just did not support Nathan Corey's theory. The rate of violent incidents at Peter Piper Pizza was about 64% higher than it was at Chuck E. Cheese. But then compare that with Dallas-Fort Worth, where we pretty much found the opposite. There, we looked at 16 Chuck E. Cheese's, four Peter Piper pizzas, and as a monthly average, the rate of disturbances and violent incidents was 70% higher at Chuck E. Cheese than at Peter Piper pizza. Although we should say we're talking

about fairly low rates of violence overall. In the Dallas-Fort Worth area, Chuck E. Cheese averages a little more than one incident every four months, and 22% of those were cataloged in the police data as domestic disputes, which is something we heard from a number of the police departments we contacted. A lot of times when there's large family gatherings at a Chuck E. Cheese, it's for a birthday or a celebration or something. That is Chief Robert Martin of the Susquehanna Township Police Department in Harrisburg, Pennsylvania. The Chuck E. Cheese there had its share of fights, although he says things have quieted down as of late. But what you had are situations where the parents might be divorced, maybe a new boyfriend or girlfriend shows up. And all of a sudden some tensions arise that are already present before the celebration within the family dynamic. And it escalates to the point where we were called.

So after filing all those records requests, the data that we have just don't suggest that prices have anything to do with the violence at Chuck E. Cheese. In fact, what they show is that even though the fight videos are shocking and dramatic, the rates of violence at most Chuck E. Cheese's is actually fairly low. That was Christopher Wirth. Admittedly, the data were spotty, the analysis a little more impressionistic than empirical. That said, there was no compelling evidence for the Chuck E. Cheese theory of customer violence caused by low game prices. A more rigorous way to address the question would be to simply ask Chuck E. Cheese to help us with a big randomized controlled trial.

For instance, what if they randomly divided their 500-plus locations, varied the prices in some and left the others low, and then measured how that affects customers' behavior, including fights? That's not going to happen. But as it turns out, there are some related changes already underway at Chuck E. Cheese. In late 2014, we started testing an RFID card program to see how our guests and our consumers would like moving over the card system. That's Mahesh Satarangani. I'm the Senior Vice President of Strategic Initiatives at CEC Entertainment. Since it began, Chuck E. Cheese has used tokens for gameplay, but Satarangani says they've started the conversion to plastic cards. And that switch over to cards was much smoother

than we anticipated. And we're happy to say that as of the end of 2016, we've completed roughly 268 of our stores on the PlayPass card reader system, and we look forward to completing the entire network of our 512 U.S. stores by the end of 2017. An RFID card allows for a lot of options that old-fashioned metal tokens don't. Chuck E. Cheese will have better data on what its customers like and don't like, and it gives pricing flexibility too. While most games and activities at Chuck E. Cheese have historically cost just one token, some longer or more involved games cost two tokens.

When you take a game from one token to two tokens, that's a pretty large price increase, 100%. And if you take it to three points, it's a 200% price increase, right? The new card system allows for more incremental increases. We'll actually start to test these where we can move to a multi-point strategy. And instead of a game being one point or a game being two points or three points, a game can be 1.2 points.

A card system also allows for dynamic pricing like airlines and hotels do, raising the price during peak demand or offering discounts at other times, all of which could help alleviate the potential for disagreements among Chuck E. Cheese customers, if indeed there are many disagreements among Chuck E. Cheese customers, which, as we heard earlier from Christopher Wirth, doesn't seem as if there are that many. We shared the police data with Steve Levitt, asked him what he made of it, especially the data from Chicago, where he lives. Now, Levitt, you've looked at the data. Does roughly one police call every three months to the Chuck E. Cheese universe of Chicago strike you as noteworthy? No, not really. I think if the police could call to a Chuck E. Cheese once every few months. Not that much. And many of the calls are for things like domestic custody disputes and things, which I don't think the parents are...

Hard to blame Chuck E. Cheese for that. Yeah. The parents aren't fighting over the games. They're fighting over the kids. So I don't know. It doesn't seem that bad to me. One thing did stand out in the data we sent over to Levitt. It wasn't a Chuck E. Cheese location.

It was one Dave & Buster's location that got way more police calls than any other place in the Chicago data. Is that really the one where you go? Yeah, that's one I go to all the time. You go there for the violence or it's just coincidence? Maybe I'm part of the violence. So far, I have escaped official statistics. But yeah, the Dave & Buster's to which I go with my kids now turns out to be roughly about four to five times as likely to elicit a police call as a Chuck E. Cheese. And I think that makes sense because it's not inhabited by five to nine-year-olds.

It's inhabited by a bunch of 15 to 24-year-olds. And as we all know, if you want to get the police involved, 15 to 24-year-olds are the age group you want to interact with. Coming up next time on Freakonomics Radio, research shows that being grateful is really good for you. It's just amazing how many positive correlates there are to gratitude. Research also shows that most of us aren't very grateful. It's so easy for people to feel resentful, to feel that life has made things harder for them than it has for other people. Why the headwinds of life feel so much stronger than the tailwinds

and what to do about it. That's next time on Freakonomics Radio. Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Christopher Wirth. Our staff also includes Shelley Lewis, Greg Rosalski, Stephanie Tam, Merritt Jacob, Eliza Lamber, Allison Hockenberry, Emma Morgenstern, Harry Huggins, and Brian Gutierrez.

This week, we had help from Matt Fidler. Thanks to Captain Scott Haynes of the Louisville Police Department in Louisville, Texas, for providing insights that helped advance our reporting. Thanks also to all the police departments that responded to our records requests. You can subscribe to Freakonomics Radio on iTunes, Stitcher, or wherever you get your podcasts. Thanks for listening. You can find us on Twitter, Facebook, or via email at radio at Freakonomics.com. Thanks for listening.