Restaurant Puzzles

Pricing

A restaurant provides me two different products: Food and a place to eat it. Both are valuable to me, both are costly to the restaurant. Yet restaurants price only the food. The table is free, however long I use it. Why?

Imagine a restaurant designed by an economist. At each table there is a clock; it starts running when the waiter shows up to take your order. When you get your bill, one of the items is table rental, based on the number of seats at the table and the length of time for which you used them.

The advantage of this approach is that it can give diners the right incentives on both margins. Diners who want to spend an hour and a half in conversation are free to do so, with no dirty looks from the waiters since they are paying for the privilege. Under current circumstances they are imposing a cost on the restaurant and the patrons waiting to be served and, social pressure aside, have no incentive to take account of that cost in deciding whether or not to move the conversation to some less costly space, perhaps someone’s living room.

Since the restaurant is recovering part of its cost from table rentals, the price of its food can be correspondingly lower; patrons will not be discouraged from choosing soup or salad by the fact that their price includes an implicit charge for tying up a table. Economist readers should be able to fill in the argument for themselves; it is the usual argument in favor of using prices as incentives to make it in the interest of individuals to take proper account of the costs and benefits of their choices.

I have, of course, oversimplified a bit. When a restaurant is half empty the marginal cost to it of my sitting at the table is essentially zero, so a restaurant should only run its table clocks during the hours when it expects to be operating at capacity. That will give diners who like leisurely conversation an incentive to fit their conversational meals into the times when they do not impose costs on others.

One can imagine special reasons why a restaurant would not adopt such a policy. Perhaps it almost never operates at capacity. Perhaps the nuisance of keeping track of table time is greater than the gains. Perhaps a clock at the table would interfere with the aesthetic experience of fine dining for its patrons.

Each of these reasons would apply to only some restaurants. So we would expect to observe a world in which some restaurants price only the food, some price only the table and give away the food — all you can eat buffets come close, although they charge a fixed price for the table, not a price per minute — and some price both. So far as I know, no restaurant follows what I have just argued is the most natural and obvious pricing strategy, separately pricing food and table rental.

Lines

Consider a restaurant whose patrons know that if they come for dinner on Friday or Saturday they will have to wait forty-five minutes for a table. The long line does not increase the number of people the restaurant can serve^[1] but does impose an additional cost on customers in waiting time, raising the total cost of the meal enough to reduce quantity of meals demanded to the quantity the restaurant can produce.

Suppose the wait is for the customers equivalent to a ten-dollar increase in price. If the restaurant raised its price for nights it was busy by ten dollars the line would shrink to close to zero. Customers on average would be no worse off, paying the extra price in money instead of time, and the restaurant would be better off by ten dollars per diner. In the longer run, the increase in the amount restaurants charged on busy nights would increase the supply of restaurants, bringing down the price and transferring some of the benefit back to the customers.

Restaurants do, to some extent, vary their price in this way, usually by announcing special discounts for low-demand nights rather than special surcharges for high-demand nights. Nonetheless, predictable long lines are a familiar feature of the restaurant world, which suggests some significant constraint limiting the degree to which they can vary their prices. A similar pattern is observed in other contexts, concerts, opening nights of popular films, and the like. Producers frequently follow pricing polices that lead to wasteful competition for underpriced goods. Doing so appears to make the producer worse off, contrary to what we would expect from the usual economic assumption of rationality.

One explanation consistent with casual observation is that a rock group or movie theater that routinely charged a price sufficient to ration demand down to supply for high-demand events would offend its customers, lose more in the long run than it gained. But this explanation raises a second puzzle: the behavior of the customers. The average customer is no worse off in the short run as a result of such a policy, since it merely converts cost in time into cost in cash. And he is better off in the long run. So why should customers be offended? Why should they choose not to patronize producers who price their goods in the way that economic theory suggests they should?

Another explanation I have seen is that a long line is advertising, evidence that the food must be good since lots of people want to eat it. It also advertises a long wait. A shorter line and a reputation for a high price should do the former without the latter.

Waiting in line costs some people more than others. Perhaps the function of the line is to change the mix of customers, more poor students, fewer rich businessmen. I have a hard time thinking of a version of that that makes sense for a firm trying to maximize its profits but not all firms are; a singer might prefer some fans to others, perhaps identify more closely with the poor students.

A final explanation, more plausible for rock concerts than for restaurants, is that the line is part of the product, benefit not cost for the people in it flirting and gossiping with fellow fans.

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^[1] A short line increases the number served, since it provides an inventory of customers that allows the restaurant to produce at full capacity in the face of unpredictable demand. The puzzle is why there are predictable lines beyond those required for that purpose, which a forty-five minute line surely is.