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Econ debate about prices at a fancy restaurant

Felix Salmon writes:

Economists Justin Wolfers and Betsey Stevenson have a problem with Grant Achatz’s pricing strategy at Next, where tickets are sold at a fixed price and are then free to be resold at an enormous markup on the secondary market . . .

“It’s democratic in theory, but not in practice,” said Wolfers . . .

If a person can sell a ticket for $3,000, the true cost of going to the restaurant — what an economist would call the opportunity cost — is $3000, because that’s how much money the person is giving up for the meal.

Bloomberg’s Mark Whitehouse concludes that Next should “consider selling tickets to the highest bidder and giving the extra money to charity” . . .

What strikes me is how weird this discussion is. Why should this restaurant owner have some sort of moral obligation to maximize his income and then donate to charity? For one thing, if he really did make more money off the deal he might just keep it. But more to the point, this sort of maximization argument is deadly because of its universality. Should Mark Whitehouse be doing things he doesn’t feel like doing, just so he can maximize his income and donate the extra to charity? And in what sense would you ever expect restaurant tickets to be “democratic” (in the words of Wolfers)??

The whole thing reminds me of our discussion of the two modes of pop-economics reasoning. You take some fact (or stylized fact) about the world, and then you either (1) use people-are-rational-and-who-are-we-to-judge-others reasoning to explain why some weird-looking behavior is in fact rational, or (2) use technocratic reasoning to argue that some seemingly reasonable behavior is, in fact, inefficient.

In this case, Wolfers and Whitehouse are going through some contortions to argue (2). In a different mood, however, they might go for (1). I don’t fully understand the rules for when people go with argument 1 and when they go with 2, but a quick rule of thumb is that when someone seems to be acting like a jerk, an economist will defend the behavior as being the essence of morality, but when someone seems to be doing something nice, an economist will raise the bar and argue that he’s not being nice at all.

I’m guessing that if Grant Achatz were to implement the very same pricing policy but talk about how he’s doing it solely out of greed, that a bunch of economists would show up and explain how this was actually the most moral and democratic option.

P.S. I agree with John Sides that Salmon should’ve checked before slamming him as “out of touch.” I think I can guess what was going on. Salmon has a fun, shoot-from-the-hip style that I generally enjoy. He should’ve known that Sides is a careful researcher and a thoughtful writer, but he didn’t. Salmon sets his criticism threshold low so he’ll get the occasional false positive.

16 Comments

  1. jrkrideau says:

    I must say I don’t understand ““It’s democratic in theory, but not in practice,”. I’m Canadian and we don’t require our restaurants to be democratic. Is there something in the US constitution that does?

    From Next’s point of view they may not be maximizing their profits–that may not be a priority — but they seem to be stabilizing their cash flow which can be very important. I suppose you could say that they are dealling in something like a futures market in meals.

    My bet would be that using the auction approach would almost immediately alienate many potential customers. They would see the approach as price goudging: the scalper approach is novel and probably aattracts more potential customers.

    Can someone explain the opportunity cost matter. If you pay $3k then it’s your opportunity cost, If someone else pays $500 — especially if it’s after the first $3k transaction– then their opportunity cost is one-sixth that of the other person

    Does economics allow for this up-and-down opportunity cost? I’m behaviour scientist by training not an economist.

    • woberz says:

      I think the Bloomberg article is intending the $3000 to be the market price of the tickets, meaning the tickets can be sold at $3000. If you purchase a ticket for $500 and then eat at the restaurant, you have essentially given up $3000 to eat there: $500 you paid out of pocket, and then $2500 you gave up by not selling the ticket. Am I close?

  2. what if all the mental gymnastics are ultimately so that (people interested in these type of evaluations) can say ‘this is what I had to go thru so that I could rationalize behavior from perspective of (1) or (2)’ That is, in the case of a superficially likable behavior, there still exists a perspective of greed/selfishness. Alternatively, even in what appears to be the most immoral choices, there may be redeeming merit. Econ allows evaluation from an alternate scenario .
    To get all philosophical, an analogy can be made with the current political debate. Whatever one’s position, the opposite is portrayed as stupid!wrong!evil!wasteful! – all descriptors with a lot of emotional weight, but little factual value. What if there was a tool that allowed individuals to set aside their judgement of the opposition and evaluate actions/choices under the assumption that the other could have real merit (and not be bad!bad!bad) ? Do exercises in econ, logic and philosophy encourage a less judgmental exploration?

  3. Edmundo says:

    The middleman collects the fee for what Grant doesn’t want to do – handle the hassle of late bookings, cancellations and rebookings.

    There’s more to running a business than mere production.

  4. derek says:

    This goes right back to Voltaire’s criticism of economists in Candide, where the economists are represented by Dr. Pangloss. Wherever Candide and Pangloss go, they encounter some injustice, and Pangloss explains to Candide that nasty is really as nice as possible, and what might seem to be the nicer alternative would actually be nastier. Thus economics proves that all is as well as it can possibly be, and we live in the best world possible. Any change in the status quo (that is, the status quo that privileges Dr. Pangloss and his friends) would be a disaster.

    • Bruce McCullough says:

      Actually, the character Candide was modeled on Leibniz.

      PS: Since Candide was published before The Wealth of Nations, Voltaire could not have intended the Candide character to represent economists.

    • seppo says:

      derek, I would be rather cautious with this kind of logic. First of all you will not see economists as defenders of status quo in majority of cases (not even here…). And more importantly – it really is rather common that our initial intuition fails us. Take comparative advantage (http://web.mit.edu/krugman/www/ricardo.htm is a nice piece on both comparative advantage and the failure of intuition), situations where dynamics plays a role and you have to look a bit in the future. Thinking about these issues rigorously will sometimes make you change your mind. What would be the point of a study if it wouldn’t alter our views at all?

  5. anon says:

    “…so [Salmon will] get the occasional false positive.”

    “occasional” hahaha, joke of the week.

  6. jrkrideau says:

    @woberz
    Thanks. I can see that arguement. I don’t think I believe it since is presusmes a large enough market wiling to pay 3K for all tickets and none left over but I think you’ve hit the nail on the head.

  7. zbicyclist says:

    The restaurant business is fickle long term. This place is supertrendy now, but may only be trendy next year and just great the year after that. But the essence of the restaurant business is repeat business. So why run the risk of alienating those who are likely to be long-term customers by catering to those who are likely to be one-time buyers?

  8. Millsy says:

    I’m surprised two economists didn’t mention the theory of restaurant pricing that Becker introduces (JPE, 1991). In essence, the idea is that a sold out restaurant does not raise its prices to short-term profit maximizing levels in order to ensure that there are long lines outside the door…a ‘social influence’ as Becker refers to it. Restaurant popularity is pretty fickle. The mechanisms behind why this happens are unclear, but it seems reasonable to believe that the utility gained from attending a popular restaurant are increasing in the quantities demanded by others.

    The same thing happens with Personal Seat Licenses at sports stadiums to a much larger extent. It’s less fun for most people to go watch a game in a half-empty stadium than it is to go to a sold-out game (granted, there are a number of OTHER reasons why these aren’t always auctioned off or sold for more at sporting events).

  9. Donald A. Coffin says:

    A couple of commenters have mentioned the analogy to scalping tickets, which is, I think a pretty good one. I think Wolfers would argue that people are in fact paying high prices for these tickets, but that the benefits of that flow not to the restaurant (owner/workers/…), but to ticket speculators. And that the diversion of those financial resources in fact makes it harder for the restaurant to maintian/improve its quality level.

    But I also think Millsy is correct in pointing out the potential transience of restaurant popularity, However, an auction scheme would deal with that. The prices people would be willing to pay would fall as the popularity of the restaurant ebbed, possiby until the equilibrium price of a ticket fell to zero.

  10. Alex says:

    (1) and (2) are typically distinguished in economics textbooks as examples of positive and normative reasoning, respectively. The former aims at describing the observed behavior in terms of a specific model (e.g. rationality), seemingly without any attempt at subjective judgement. The latter takes the former as given and applies a subjective social welfare function to the outcomes in order to judge, whether the result could be improved upon with, say, different institutional arrangement or a policy intervention.

    • Andrew says:

      Alex:

      Yup, and the usual rule seems to be to use positive reasoning when someone seems to be acting like a jerk, and normative reasoning when someone seems to be doing something nice. This seems odd to me. Why assume that, just because someone is acting like a jerk, that he is acting so efficiently that his decisions can’t be improved, only understood? And why assume that, just because someone seems to be doing something nice, that “unintended consequences” etc. ensure he’s not doing a good job of it. To me, this is contrarianism run wild. I’m not saying that Wolfers is a knee-jerk contrarian; rather I’m guessing that he’s following default behaviors without thinking much about it.