The Hindu Business Line : <I>Economics of pricing dessert </I>

Consider this. My friend, a psychologist, frequents fancy restaurants. He has the main course at such restaurants but always visits an upscale low-calorie fruit juice shop for dessert. When questioned about his behaviour, he said that he liked to frequent places that offered value for money. There is a lesson here for those interested in economics. What is it?

An expensive dessert

You know how restaurants price food. The main course is typically nominally priced while the desserts are expensive. Why? After you have had a sumptuous main course, it is highly unlikely that you would think of going to another restaurant for dessert; psychologists are exceptions to any rule. Restaurants, therefore, charge higher prices for desserts.

Economists call these hidden costs. That is, the restaurant lures you as a guest with nominal prices for the main course. But only after you enjoy the services do you know that the dessert is expensive.

What if you open a nearby restaurant with slightly higher prices for the main course but no-so-expensive dessert? Would you advertise that your total meal is lower than the fancy restaurant next-door? Or would you say that your dessert is cheaper than your competitor's?

If you do that, smart people like the psychologists will have the main course at the fancy restaurant and walk into yours for just the dessert. Both restaurants will be worse off in the process. Why?

The hidden costs

The fancy restaurant will not earn a high margin on the main course. Neither will you on your desserts. That is, perhaps, why we do not find companies squabbling about their competitors' hidden costs. For if you had known about the hidden costs, you may not be banking with the private sector banks. Or would you?

(The author is based in Surrey, BC, Canada)

More Stories on : Economics | Simple Economics

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page