2014: Isn't hotel price gouging in Omaha just the free market at work?

BECKY QUICK: This question comes from Darren Bordemier (PH). He says, “Warren, you’ve commented in the press that you are concerned about the hotel price gauging in the Omaha area during the Berkshire meeting weekend.” (Applause) Hold your applause, you haven’t heard the rest. “Please elaborate further on that position, as it seems to contradict free market capitalism. Shouldn’t the law of supply and demand apply in this case?”

WARREN BUFFETT: Absolutely. And so therefore, since we want to increase the demand, the proper thing to do is increase the supply, right? (Laughs) And that’s why we have encouraged, for example, Airbnb, to come in and — they supplied some rooms this year.

But it’s very logical. If you think about most cities, the big events that come to their convention centers and use their hotels, they size themselves in deciding where to go. If you have a relatively small industry, they can pick a moderate-sized city and they can have their convention there, and they don’t outstrip the supply of rooms. If you have a very big industry and you’re having a convention, you know, you have to go to some place like Vegas or some place that has a lot of rooms because otherwise you do throw the supply-demand out of whack.

So, if you have an event, which isn’t sized by the people that are scheduling it, can’t be sized by the people that are scheduling it, then you can totally outstrip rational supply of rooms. I mean, you know, the great case would be something like the Masters tournament. I mean, Augusta can’t size its hotel industry to Augusta, to the Masters, and the Masters isn’t going move any place. Well, there — are certain events like that, but there aren’t very many.

And Omaha cannot size its hotel supply to the Berkshire meeting. It sizes it to the kind of conventions it normally gets and all of that, but the Berkshire meeting has grown beyond what we anticipated. So fortunately, there’s developed — and for that reason people started putting in — what really bothered me were the three-day minimums. I mean, it — you know, I think there’s something particularly irritating about somebody’s coming in for a one-day event to have to buy — have a three-day minimum. And the prices were getting high.

Incidentally, the Omaha Hilton right across the street, they — they’ve been magnificent throughout this, as have many others. But there were a few that were really pushing things, and we didn’t want to cut down on the demand. We didn’t want to move to Dallas, even though we’re opening a store there next year, it would be kind of fun for that. But we’re not going move to Dal — I mean, we want — Omaha people love this event, it’s an economic boon for Omaha, but — and people get a good impression of Omaha when they come here, generally.

So it’s — there’s a lot of good things about having the meeting in Omaha, and we can’t expect anybody to build new hotels to take care of three days a year. So, fortunately, something like Airbnb is sort of a flex supply arrangement that seems to me to make a lot of sense for it. And I think that it will be more developed by next year, and I think that the hotels will do extremely well next year. But I don’t think they can push it to the ultimate extreme of a total scarcity product. And we want them to do well, and that’s why we’ve gone where we have.

CHARLIE MUNGER: Nothing to add.