Wednesday, March 14, 2007

The Restaurant Puzzle

A restaurant provides me with 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 you use it. Why?

To see the puzzle, consider how a restaurant designed by an economist might operate. At each table there is a clock; it starts running when you sit down and the waiter shows up to take your order. When you get your bill, one of the items is table rental, proportional to 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 be used to 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—but they will pay 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 getting soup or salad by the fact that their price is higher than the actual cost of producing them by the full amount needed to pay the restaurant's fixed costs. 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 run its table clocks only during the hours when it expects to be operating at capacity. That will give diners who like leisurely conversation an incentive to try to fit their conversational meals into the times when they do not impose costs on others.

It's easy to 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 priced only the food, some priced only the table and gave 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 priced both. Yet, 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.

Which is the puzzle.


COD said...

Don't private dining clubs, country clubs, etc essentially sell the table space? It's not a per minute charge, but if you are paying $100 a month for the right to enter the premises, that is essentially table rental by the month.

Phil Birnbaum said...

Wouldn't the clock have to start when the food actually arrives? Otherwise, you'd get lots of complaints about how you're not paying for a 20 minute wait when, dammit, it only takes 12 minutes to cook a steak.

Also, you'd have to have some kind of way to call the waiter when you were finished eating, to stop the clock. Why should the customer pay for the waiter's slowness in clearing the table?

Didn't someone once argue that restaurants do build waiting times into prices, by overcharging for appetizers and desserts (relative to entrees)? Appetizers add occupancy time for the table, and often only one or two diners at the table order one. Same for the $6.95 slice of chocolate cake. These high prices effectively compensate the restaurant for the occupancy time.

Anonymous said...

Perhaps the table cost is worked into the food prices. In Europe, may restaurants charge table fees. It should be possible, empirically, to compare prices correcting for that fee to see if this is the case.

nice try said...

heres a random theory: maybe restaurant managers deliberately want to give the impression to the customers that they are full -- presumably the more crowded a restaurant seems people are more likely to assume that its a better restaurant. no one would arguably venture into a restaurant that is empty (higher risk that the food/service is bad!)

Richard Brown said...

Not identical but Belgo in London do something along your lines:

"Beat the Clock between 5pm and 6:30pm where the time you order is what you pay, hence 5:31pm is £5.31p"

Provides an incentive to dine earlier in the evening...

Anonymous said...

This already goes on, to some extent, with bars and clubs that have cover charges and/or drink minimums. I think you're quite right that people don't like the feeling that they're "on the meter" when they're in a social setting, which is why these establishments charge in advance, or impose some apparently non-monetary requirement, like the purchase of overpriced drinks.

Anonymous said...

My sole experience with anything like this was an all-you-can-eat sushi bar that charged by the hour. (Near UCLA, 20 years ago -- no idea whether that business model worked out for them.)

Anonymous said...

Not True! I was visiting London over the New Year's break and was shocked to find a cafe that charged 10 to 15 pence more per item depending if you were going to stay in the cafe to eat it. Though I understand the idea because of my economics background I was a little offended. I chose however to stay.

While in Venice however I found the opposite. I ventured into a restaurant to have an after lunch coffee and dessert. My company and I sat down and attempted to order. The place was empty. The waiter after hearing our order said that we were not ordering enough food and could not eat in the establishment. Of course, I was more offended by the Italian eatery than the British.

I still don't understand the Italian point of view. Could someone give me a possible rationale?

Anonymous said...

1) People are likely to "buy some more time" when being frowned upon by buying an overpriced dessert or an overpriced coffee.

2) There is a high mental accounting cost in keeping track of time

3) People have a pseudo anti-consummerist attitude that would make them diss having to pay for the time. Paying for the time is very very visible, paying less for the food not so much.

But actually I thought of the concept at a Restaurant once... I was waiting and wished I could outbid the people in front of me.

Imagine a restaurant where people would bid on time slices with a Dutch auction to fill all the table. The restaurant could even "buy" some of its own time slices for arbitrage purposes if they are expecting late comers.

Tim Worstall said...

Not sure of the actual chain (Hard Rock Cafe, something like that) used to have alarm clocks on the tables. 45 minutes and your time was up. As they also always had a line waiting for tables seemed to work for them.

David_Z said...

Most cafes in France charge you more per item if you want a table outside. They charge less if you sit inside, and even less than that if you have your espresso standing at the bar.

But I've worked in a wide variety of restaurants in my life and I can tell you this: At any restaurant with a liquor license, the bill is a very good proxy for your "table rent." The longer people stay, the more they drink - in most cases. And the markup on booze often exceeds 300%. Sure, you get the occasional table that doesn't order the after-dinner-drinks. But most tables turn in a pretty standard amount of time, which varies from restaurant to restaurant. And most tables that exceed the standard time, also exceed the standard bill.

Anonymous said...

I've seen a coffeeshop with signs saying that one must order an item every 2 hours. People were so offended by the explicit signs that they went away pretty quickly, though.

Anonymous said...

I think the problem with this model is transaction costs. Customers don't like keeping track of time at the table, any more than workers like keeping track of when they clock in or clock out, or internet users like keeping track of megabytes. People sometimes want to effectively rent space -- but they don't want to feel like they're renting space, or keep track of how long they're renting it for.

So while in theory, additional costs would shape usage appropriately, in practice they would be a competitive disadvantage. In fact, there are places that effectively -do- rent out space (like Starbucks) but do so only with mildly inflated prices for food and drings.

Anonymous said...

A lot of restaurants have "early bird specials" to induce people to eat at times when there are more tables empty.

Markm is right that Americans prefer flat rate services. I know I do. I'll pay more for an all-you-can-eat buffet than for a comparable meal off a menu, even though the latter almost never leaves me hungry and often includes leftovers to take home.

This preference applies to other types of service as well. Remember how, in the early days of the Internet, service providers charged users based on how long they were logged on? Remember how Disneyland used to collect a separate ticket for each ride, with five different ticket prices based on the intensity of the ride? Perhaps the transaction cost savings helped kill those practices, but consumer preference will surely prevent their revival.

Eric Goldman said...

In business school, we studied a case on Benihana. As I recall, the case's main issue is that Benihana used its chefs' performances as a way to signal the end of the show, which in turn caused people to turn over much faster than at other restaurants, and this rapid turnover was part of the business model and its success. Eric.

Anonymous said...


When you buy a restaurant, what you are buying is the inside space plus a right granted by the city to use some of the pavement as outside space. The only way to "buy" more outside space is actually to buy more restaurants thus you cannot increase your outside space without increasing your inside space.

There is a higher demand for dining outside, with the sun, the air etc, especially in touristic zones, but since you can't expand outside space without expanding inside space, it really means that outside space is more expansive to you, hence the higher price mark.

Tipping in France is different than tipping in the US. There is a 20% service charge included in the bill and people will add a tip only if they feel like it, which may amount to 3 or 5% of the total bill but is definitely sub-linear.

Anonymous said...

Because it's not profitable to charge the table. Unlike food, which is physical and quite standard (at least it's menu-based or so), there is tremendous difficulties (or costs) to charge the table or space related service.

Rent a table and buy a food? Why not buy a food with average markup which reflects the table cost?

John Fast said...

1. As someone who lives in South Florida, which is famous for such things, I agree that many restaurants use early-bird specials as a crude version of an incentive system.

2. As a customer, I would be very uncomfortable with a restaurant that charged for table time because that is largely under the control of the restaurant itself: how long it takes to get my food. (I don't know about others, but I often have to spend more time waiting for my meal than eating it.)

In fact, this system would provide an incentive for restaurants to provide worse service.

3. If you actually mean the sort of system which Phil Birnbaum described, then this does not apply -- but I did not get that impression.

And Phil's sensible system has its own disadvantages. By (quite reasonably) excluding waiting time, that means it deals with only half of the time actually used. More importantly, diners who want to spend an hour and a half in conversation will not enjoy it as much if there is a little voice in the back of their mind reminding them that the meter is running.

4. I enjoy economic conundrums like this one, and the similar question about popcorn prices. I am very curious why economists, when dealing with real-world questions like these, don't actually approach proprietors of restaurants and movie theaters and ask them directly.

Personally, I believe the reasons restaurant owners don't charge for table time are:

1. They can either charge for all time, including waiting time, which is unfair; or else charge only for eating/lingering time, which is actually insignificant;


2. Diners will feel very uncomfortable about being pressured to eat quickly. Remember that most (non-fast-food) restaurants seem to try to attract customers by creating a "You're like family, you're welcome here" atmosphere, and charging for time completely contradicts this. (Remember the quotation from _Pride and Prejudice_ cited by Lewis in "Priestesses in the Church.")

Anonymous said...

There is one sense in which many restaurants in crowded cities charge by the hour: parking fees. If they own the lot, they benefit directly from the time spent by patrons who came by auto. If they don't own the lot, they will typically only validate for a certain length of time, so that the customer bears additional costs for overtime, reducing their tendency to stay too long.

Anonymous said...

In coffee houses in Vienna one sometimes encounters a "water fee," that is a charge to sit at the table and not order anything (beyond the tap water), or to stay for a long time. I used to do my homework in a cafe near my apartment and would therefore stay there for hours but only ordering a tea or a snack, if anything at all, so I viewed the water charge as a small rent for my space. That it wasn't more I attributed to my own role as ambience; I lived in a tourist area at the time and foreigners liked to feel they were in a "real Viennese Coffee house" where real student went to study and hang out.

Anonymous said...

I should have thought that the charge is factored into the price. When you eat at a (Chinese)restaurant in London's Chinatown, the meal is generally over within an hour. Subtle (and occasionally overt) pressure is used to encourage the diner to move on. This partly accounts for lower cost of dining in Chinatown.

Re Richard Pointer's post: in the UK, food consumed on the premises is subject to a sales tax (VAT) at 17.5%; food taken away is not.

Phil Birnbaum said...

Two more thoughts: (1) perhaps the actual amount of unprofitable extra table usage is small; and (2) there is a second source of table wastage that we didn't consider.

In my experience, most people eat at about the same rate. Also, most people order within a reasonable time of taking the table (and, when not, it's often because they’re ordering drinks, paying for the time that way).

So when a group stays at the table too long, it's usually because they linger *after dinner.* In my experience, when it's very crowded, the waiter may request that the group move to the bar, or some such.

Suppose 10% of parties linger unprofitably. Suppose when they do so, they linger 25% of their total table time. And suppose the staff will shoo them out only 30% of the time. That means the restaurant's loss is about 2% of total table time (10% times 25% times 70%).

But now consider another source of table-space loss: unoccupied seats. Almost every table in a restaurant seats an even number of people. When a single diner comes in, or a group of 3, 5, 7, etc., one seat is completely wasted for the full duration of the meal.

To be extrac conservative, suppose only 1 in 10 parties is odd. And suppose the average size of an odd party is 4 (evenly split between 3 and 5, say). That means that odd parties waste 20% of the average table. The restaurant's loss, then, is 10% times 20%, or about 2%. That's almost exactly the same as the "linger after dinner" loss, although, admittedly, I chose the numbers to work out that way.

But even if the numbers are slightly different, the argument is roughly the same. And that means there's a second puzzle: Why don't restaurants charge extra for an odd number of guests?

Anonymous said...

There are some restaurants that charge "for the table", but the food is "free". One such is the sponsors club at Mariner Statium in Seattle. The menus have no prices. The food is "free". However, the card that gets you in the door costs many thousands of dollars per year.

Lester Hunt said...

I know this will be something of a heresy on this page, but I suspect that the solution to the puzzle is that restaurant customers are to some extent applying a non-marked paradigm to the restaurant experience. "The hostess will seat you in a moment." Hostess? The paradigm is host/guest rather than buyer/seller. You don't charge your friend sofa rental in your living room, do you? This paradigm is a fiction of course: you are a buyer and not a (personal) guest. But I guess my idea is that both seller and buyer get enough out of this fiction to make it (with exceptions) not worthwhile for some more entrepreneurial individual to offer a different arrangement.

Mike Hammock said...

If you rent a room in a restaurant or other business with "party" facilities, they sometimes charge by the hour, as well as having charges that vary with the type and quantity of food ordered (and other entertainment expenses). What is different about this particular facility, as compared to regular tables in a restaurant? Perhaps the answer to this question will answer the general question.

Anonymous said...

Large hotels provide a much more interesting, complex and revealing business model than restaurants:
Hotels charge for time and space, as they rent rooms by the day/night. And on top of that they charge (with huge mark-up) for variable consumption of the mini-bar, PPV movies, and room service meals.
BUT the same hotel also has a restaurant and a bar, and it does NOT charge for table space or table time there, making money only on food and beverages.
IN ADDITION, the hotel also has meeting rooms which frequently will operate in both ways: a salon can be booked with separate charges for the space and for the food+beverages, but the same salon may also be booked with no charge for the space when there is sufficient consumption of food+beverages.
Of course, IF in the bedrooms, restaurants, bars, lobbies, meeting rooms and conference centers the hotel applied separate variable charges for the use, say, of toilets, toilet paper, electricity, cold water, hot water, towels, paper towels, air conditioning, and other costly things (all scanned and billed through the magnetic strip on a key card) ... the hotel would be sublimely rational and, dare I speculate, alienate its customers and go broke.
To adapt the questions posed by the original post: How would a hotel designed by an economist operate? What is the "natural and obvious pricing strategy" for a hotel? I submit that it is pretty much what we see in practice ... and that it has been guided toward this wondrous state as if by an invisible hand.
As for the much simpler case of non-hotel restaurants, I too remain puzzled, but much less so than before I started thinking about hotels.
One must marvel when in Western Europe - home to a sclerotic socialistic economic culture - that they are annoyingly rational when McDonald's "over there" dares to levy an itemized charge for ketchup - something that would make perfect sense in the Hyde Park neighborhood of Chicago, where it also would be quite unthinkable.
In fact, since we are pondering puzzles of restaurant irrationality, is there any fast food chain that charges for ketchup packets at its U.S. restaurants?

MensaRefugee said...

We already have restaurants (of sorts) that follow your model David.

They are called Internet Cafes :)

Anonymous said...

I have also wondered why do restaurants that periodically have very long waiting times never (as far as I know) auction off their seats to the long line of people waiting at the door? Why do they keep serving guests in the order they arrive?

Restaurants periodically sell food to customers who want only food but not the time at the table (think of carry-out orders). But they never do the opposite. I can’t think of a restaurant where you could go sit at the table and just read your book without ordering anything. Even if you offer to pay for it, the answer is usually that the tables are for diners. (I wonder if on a very busy night you offered a restaurant to pay to keep a couple of tables empty all night long, what price would they ask?)

It’s possible that in some restaurants of some European countries there is a wide margin between carry-out prices and served-in-diner prices, since in Europe it’s not unusual for waiters to get hourly wages (the more demand for food served at the table, the more waiters would be needed).

Anonymous said...

Table usage is correlated, closely enough, with food consumption.

Here's something more puzzling. Some major internet providers advertise a "flat rate" service, but if your usage exceeds an unpublished threshold, they terminate your service, i.e. refuse to serve you at any price. That seems really inefficient.

Anonymous said...

This article assumes the diner should pay for the time the restaurant takes to prepare their food. This micropayment system breaks down in logical progression where the diner charges the kitchen for how long it takes to prepare their meal. In the hasty rush, quality suffers. Further, you're living in a dream world if you think wait staff don't have methods to pressure lingering diners. This subject needs far better analysis.

Anonymous said...

Rental costs, in most cases, would be quite insignificant compared to the (rest of the) cost of the meal. And quite insignificant compared to the cost of keeping track of time.

Another puzzle: Why do restaurants use percentage mark ups, rather than fixed ones, forcing patrons to buy lower quality foods and wines than they would otherwise prefer? (Some restaurants do, however, have fixed mark ups on wine, but they are a small minority)

Leonard said...

As Phil points out, any situation where the amount charged a customer is at least partly in the control of the seller is a bad thing. Every transaction must be monitored for cheating, and people don't want to do that. Nonconfrontation people will just go away bitter. OTOH, confrontation in your business while other customers watch is the last thing a business owner wants.

I don't see any good ways to run the clock only when the customers are controlling the time spent. I suppose in theory customers and restaurants might employ neutral agents to do this, but clearly the transactions costs would be excessive.

Anonymous said...

This I think is one example of the surchage vs discount situation that you explained in one of your articles.
Even busy retaurants have extra tables avaliable most of time they are open for business.
If charging for time makes sense only on the rare occasions when the restaurant runs at full capacity then it is a surcharge.

Anonymous said...

I initially thought of price discrimination (the first place to look in these sorts of puzzles), but this actually makes the problem harder, not earlier.

Here's the complication. Most (successful) restaurants have some market power. Even similar restaurants have different products (food, location, atmosphere, etc), and are not perfect substitutes for each other. And so the restaurant market is one of monopolistic competition.

If so, a restaurant that separately charged for food and time could price discriminate.

At restaurants where the people who tended to stay longer were wealthier, the restaurant could charge slightly more for the time and slightly less for the food. Wealthier patrons who stayed longer would end up paying more than if the restaurant simply priced its food, and poorer patrons who left earlier would end up paying less. The restaurant would earn more revenue.

At restaurants where people who tended to stay longer were less wealthy, the pricing could be reversed.

Restaurants that do not do this --- that is, all restaurants --- are passing up an opportunity to capture more monopolistic profits.

* * *

BTW, I think most people have not squarely faced the economic question. There may be lots of good reasons why a particular restaurant does not price this way, especially at particular times. But David's point was that NO restaurant prices this way at ANY time. And that is certainly puzzling.

Anonymous said...

A follow up on my earlier post:

To illustrate that rental costs are likely to be insignificant, consider these simple calculations. Assuming

- a cost of $5000/year per square meter,
-an interest rate of 5 %,
- every patron needs 4 sqms
- restaurants are open 10 hours a day

the rental cost will be 30 cents/hour per guest.

Mike Hammock said...

Another bit of evidence that may be worth mentioning: Restaurants charge lower prices at lunch than at dinner, and the reason I usually hear is that they have faster turnover of tables at lunch (because people have a limited amount of time). Therefore restaurants are implicitly charging customers less because they take up table space for a shorter period of time.

Doesn't this suggest that businesses are aware of this problem, but find it too costly to address it in a direct way (i.e., a clock on a table tied to a fee per unit of time)? Combine this with the fact that some kinds of reservations include a charge on the basis of time, and it suggests to me that firms only bother to track actual time at the table when it is very inexpensive to do so, e.g., when it is arranged in advance.

Anonymous said...

Restaurants are in the business of selling prepared meals with an atmosphere. Starbucks doesn't just sell coffee (bad coffee at that), but an experience that hopefully compels me to return. A full service restaurant does the same.

Pricing the atmosphere by the minute, then, simply creates a somewhat less pleasurable experience, which drives people away.

So how do restaurants square their competing interests? Make your stay pleasurable, but not something for which you wish to linger. Do this by having slighly uncomfortable seating (hard seats and straight backs. Set the air conditioning low so that you feel cold in a short period of time. Tables may be placed close together, making your conversation less intimate than you'd prefer. Restaurants want to make it homey, but not necessarily confortable.

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