The website, myarmyonesource.com, which offers advice to army families, suggests that parents join a babysitting cooperative—an arrangement that is common in many walks of life. In a babysitting cooperative, a number of parents exchange babysitting services rather than hire someone to babysit. But how do these organizations make sure that all members do their fair share of the work?

As myarmyonesource.com explained, “Instead of money, most co-ops exchange tickets or points. When you need a sitter, you call a friend on the list, and you pay them with tickets. You earn tickets by babysitting other children within the co-op.” In other words, a babysitting co-op is a miniature economy in which people buy and sell babysitting services. And it happens to be a type of economy that can have macroeconomic problems.

A famous article titled “Monetary Theory and the Great Capitol Hill Babysitting Co-Op Crisis” described the troubles of a babysitting cooperative that issued too few tickets. Bear in mind that, on average, people in a babysitting co-op want to have a reserve of tickets stashed away in case they need to go out several times before they can replenish their stash by doing some more babysitting.

In this case, because there weren’t that many tickets out there to begin with, most parents were anxious to add to their reserves by babysitting but reluctant to run them down by going out. But one parent’s decision to go out was another’s chance to babysit, so it became difficult to earn tickets. Knowing this, parents became even more reluctant to use their reserves except on special occasions.

In short, the co-op had fallen into a recession. Recessions in the larger, nonbabysitting economy are a bit more complicated than this, but the troubles of the Capitol Hill babysitting co-op demonstrate two of our three principles of economy-wide interactions. One person’s spending is another person’s income: opportunities to babysit arose only to the extent that other people went out.

An economy can also suffer from too little spending: when not enough people were willing to go out, everyone was frustrated at the lack of babysitting opportunities.

And what about government policies to change spending? Actually, the Capitol Hill co-op did that, too. Eventually, it solved its problem by handing out more tickets, and with increased reserves, people were willing to go out more.

Solutions appear at back of book.

In 2001 and 2002, the travel industry was in deep trouble. After the terrorist attacks of September 11, 2001, many people simply stopped flying. As the economy went into a deep slump, airplanes sat empty on the tarmac and the airlines lost billions of dollars. When several major airlines spiraled toward bankruptcy, Congress passed a $15 billion aid package that was critical in stabilizing the airline industry.

This was also a particularly difficult time for Priceline.com, the online travel service. Just four years after its founding, Priceline. com was in danger of going under. The change in the company’s fortunes had been dramatic.

In 1999, one year after Priceline.com was formed, investors were so impressed by its potential for revolutionizing the travel industry that they valued the company at $9 billion dollars. But by 2002 investors had taken a decidedly dimmer view of the company, reducing its valuation by 95% to only $425 million.

To make matters worse, Priceline.com was losing several million dollars a year. Yet the company managed to survive and thrive; in 2014 it was valued by investors at over $63 billion.

So exactly how did Priceline.com bring such dramatic change to the travel industry? And what has allowed it to survive and prosper as a company in the face of dire economic conditions?

Priceline.com’s success lies in its ability to spot exploitable opportunities for itself and its customers. The company understood that when a plane departs with empty seats or a hotel has empty beds, it bears a cost—the revenue that would have been earned if that seat or bed had been filled. And although some travelers like the security of booking their flights and hotels well in advance and are willing to pay for that, others are quite happy to wait until the last minute, risking not getting the flight or hotel they want but enjoying a lower price.

Customers specify the price they are willing to pay for a given trip or hotel location, and then Priceline.com presents them with a list of options from airlines or hotels that are willing to accept that price, with the price typically declining as the date of the trip nears.

By bringing airlines and hotels with unsold capacity together with travelers who are willing to sacrifice some of their preferences for a lower price, Priceline.com made everyone better off—including itself, since it charged a small commission for each trade it facilitated.

Priceline.com was also quick on its feet when it saw its market challenged by newcomers Expedia and Orbitz. In response, it aggressively moved more of its business toward hotel bookings and into Europe, where the online travel industry was still quite small. Its network was particularly valuable in the European hotel market, with many more small hotels compared to the U.S. market, which is dominated by nationwide chains. The efforts paid off, and by 2003 Priceline. com had turned its first profit.

Priceline.com now operates within a network of more than 295,000 hotels in over 190 countries. As of 2013, its revenues had grown well over 20% in each of the previous five years, even growing 34% during the 2008 recession. Clearly, the travel industry will never be the same again.

QUESTION FOR THOUGHT

Question 1.6