Tuesday, October 13, 2015

Some Economic Puzzles

Visiting China last year, I was struck by an interesting puzzle. In the U.S., if you are in a big building selling clothes or groceries, a department store or a supermarket, the people selling them to you are employees of the firm that owns the building. In China, you are much more likely to be in a building whose owners rent it out in small pieces to a lot of individual sellers. Instead of a supermarket, you have a large building with half a dozen butcher stalls, eight fish stalls, ...  . Instead of a department store, you have the same pattern with different stalls selling different sorts of clothing, jewelery, electronics. 

The pattern is not perfect. There are supermarkets and department stores in China and I once saw a Chinese style food market in Baltimore. But one form of retailing is the norm in China and the exception in the U.S., the other form the norm in the U.S., the exception in China.

The puzzle is why.

On my recent visit to Brazil, I came across another such puzzle. In Brazil, at least in Sao Paulo, restaurants frequently sell food not by the dish but by the kilo. You fill up your platter with whatever combination of salad, beans, meat, desert you want, they weigh it and charge you. I do not believe I have ever seen that pattern in a restaurant in the U.S. The closest I can think of is the cafeteria in my university, which sells salad by weight, most other things by individual price.

There are obvious advantages and disadvantages to that way of selling food. The puzzle is why it is common in one country, rare or non-existent in another.

That reminds me of another puzzle that struck me a very long time ago. Some of the costs that a patron imposes in a restaurant depend on what he eats, some on how long he sits. Why are there no restaurants that price the two separately—charge a lower than usual price for the food, but add an additional charge for the time you sit?

For any reader who teaches economics, I suggest that working through the logic of these three puzzles, seeing what the costs and benefits are of one form of organization over another, would be a good problem to set your students. For any graduate student looking for a thesis topic who is more interested in doing economics than proving how much mathematics he knows, one of these puzzles might be worth considering. 

The first step, of course, would be a survey of the literature to see if someone else has already offered an adequate answer. If you find one, let me know.

32 Comments:

At 12:15 PM, October 13, 2015, Blogger Cathy Raymond said...

Actually, David, eating places that "sell food by the [unit of weight]" do exist in the U.S. Supermarket food courts, e.g., like the ones in Wegmans supermarkets do so, and so does DiBruno Bros. (a Philadelphia area store that sells both packaged gourmet foods and food ingredients and hot food and cold salads and sandwiches to eat on the premises).

 
At 12:33 PM, October 13, 2015, Blogger Richard O. Hammer said...

About the first puzzle set in China, with many small businesses instead of one large firm, I am struck it may be a result of regulation (and not of the economics of transactions costs). Small family-sized businesses may escape the attention of government regulators, whereas any visible outside-the-family employment may attract crippling regulation and taxation. Substantial enterprises may be licensed, in most of China's (not-free) economic zones, to only specially-connected government loyalists. (Somewhat related: Uncle Ron's 2013 book How China Became Capitalist offers insight.)

Something like this (difference in regulation based upon difference in business size) appeared to be the case in Bali (where I attended that conference at which you spoke David, three months ago). One American expat living in Bali spoke of how free it was there for anyone to start a business. But I questioned him about the size of the business which would escape crippling attention from government. He was referring to a tiny business, a partnership or a couple perhaps. He concurred with my suspicion that a larger business would probably be killed by the attention it would receive from government. Indeed, from what I could see of industry visible in Bali, it appeared to be mostly storefront-sized businesses.

The way to start understanding this, I would say, is not with an economics-literature search, but with an attempt to understand the forces acting upon a small business owner in the subject community. Seek local knowledge. If you can get to know a prospering small business owner, and if that owner dares to talk candidly with you, ask why he or she does not expand the business.

 
At 1:05 PM, October 13, 2015, Blogger Jay Maynard said...

There were two stores in Houston like the one in China you cite, Globe and Sage, years ago. Both went out of business by the late 60s or early 70s. I don't know why, but I suspect that they got out-competed by the buying power of bigger department store chains.

 
At 1:56 PM, October 13, 2015, Blogger David Friedman said...

Cathy:

Are the stores you mention selling all food at the same price per pound? Steak and tomatoes (assuming they sell both)?

 
At 3:09 PM, October 13, 2015, Blogger chofland said...

Lee's Deli (which pop up every few blocks in parts of San Francisco) sells prepared food by the pound. Some are Chinese food only, some have a wider variety. There was also another establishment in the Financial District that was a buffet that charged by the pound when I last worked there in 2010.

 
At 3:12 PM, October 13, 2015, Blogger Richard O. Hammer said...

The two Whole Foods stores with which I am familiar here in North Carolina sell a buffet of foods on plates by weight. The offering may not include the most expensive items like steak, but it is a broad range.

 
At 3:31 PM, October 13, 2015, Blogger Michael Dolbear said...

I understand there are supermarkets where, for a fixed fee, they will cook what you have bought.

And salad bars commonly charge a fixed price per volume with small, medium and large boxes with lids which must close.

But the nearest to 'by weight' was the rule in Greek Tavernas where if you opted for fish they were required to give you a slip with the weight and ? market price, I suppose so you could check the mark up.

But going back "In the U.S., if you are in a big building ... the people selling them to you are employees of the firm that owns the building."

Not so since every department store had and has "concessions",typically perfumes, makeup & jewellery and these days coffee shops and food court restaurants.

In the 19th century in Britain a covered market or market hall or bazaar would have common services but each business would pay rent or commission to the building owner. Some survive and prosper to this day. Shopping malls (with rents based on sale volume) are another variant.

 
At 4:05 PM, October 13, 2015, Blogger Jay Maynard said...

I can't speak to DiBruno Bros., but Wegman's definitely offers everything in their prepared food court by the pound, for the same price. You fill a plate from whatever you like, and the cashier charges you by weight.

If you find yourself not he East Coast, seek out a Wegman's for a meal. It's really quite good.

 
At 4:15 PM, October 13, 2015, Blogger 38cc2266 said...

SBarro in their buffet type section sells food by the weight.

 
At 5:46 PM, October 13, 2015, Anonymous Jessa Mittleman said...

It's fairly common in France, at least in my experience, for cafes to charge a higher price for the same drink if you sit at a table vs. stand at the bar. It is understood that you are paying for the use of the table. Last time I was there, it was sufficiently common that my guidebook warned about it.

 
At 6:05 PM, October 13, 2015, Blogger Chris Bogart said...

Could it be that there are extra coordination costs in doing something unusual compared to the society around you? If you wanted to set up a Chinese style market in the US, you'd have to figure out how all the contracts would work, how to handle customer complaints, who would clean, etc. You'd probably get something wrong and have to iterate on it as problems cropped up, and you've have to sell the idea and explain it to lots of people.

So maybe some differences like this could be quirks of history and habit, and not be fully explainable by different laws, economic conditions, or deep cultural preferences.

 
At 6:19 PM, October 13, 2015, Anonymous Power Child said...

"Why are there no restaurants that price the two separately—charge a lower than usual price for the food, but add an additional charge for the time you sit?"

My guess is it's a mixture of several reasons:

1. It's not worth it. Most restaurants' table space is not so in demand that it would make the added complexity of the calculation worthwhile; and

2. Patrons are humans with emotions. Squeezing those few extra dollars of value out of each patron is not worth causing the discomfort that patrons feel when they know there is a ticking clock, based on which they might decide to go somewhere else in the first place. Also,

3. Those after-meal minutes may be prime money-making time for restaurants. Patrons who linger may order items like drinks and dessert that don't cost the restaurant much to produce, or the patrons may tip better because they appreciate the leniency and patience of the wait staff who have by then had more opportunities to walk over and smile and ask if the patrons would like anything else.

I think all of these reasons got offered last time you posed the question on this blog. Apparently you remain unconvinced?

 
At 9:59 PM, October 13, 2015, Blogger Cathy Raymond said...

David: DiBruno's sells prepared foods by the pound: mashed potatoes, meat dishes (such as stews), vegetable medleys, cucumber salad, and other things. You fill your plate, and at the checkout counter it's weighed and the price is based on the total weight (I believe the actual price is $8.99 per pound). Fruit, cookies, soup, and sandwiches, are charged for separately, and you can select a roll for free.

Wegmans Food Court also sells prepared foods. They have separate areas for hot foods (rice, chicken wings, stir-fry dishes), cold foods like pasta salads or green salads, and fruits/puddings, but the price for everything is the same--$8.99 per pound. People can and do mix items from the different food bars in the same container, and the checkout machines deduct the weight of the container (they use lidded boxes of different types) if one inputs the correct container number (Tare 6, 10, 17 covers most of the variations); that way you're not paying extra for the container weight. Soup is separate, as are rolls, sandwiches, and sushi. Does that answer your question?

 
At 10:04 PM, October 13, 2015, Blogger Cathy Raymond said...

And now that I think about it, there's a competitor of DiBruno's that does the same "food per pound" model. They're called Pagano's, and their system works just like DiBruno's except that the dishes made are more mundane. It's been too long since I ate at DiBruno's so I can't give examples, unfortunately.

 
At 11:25 PM, October 13, 2015, Blogger Jonathan said...

I agree with Power Child, point 2. Restaurant customers aren't accustomed to being charged for time, and it would make them uncomfortable. It would also make them uncomfortable to see other diners rapidly stuffing themselves with food in order to finish as soon as possible.

Time charges would lead to a rush of complaints about slow service. Not all of the time spent is due to the customer: customers often spend a good deal of time waiting for food to arrive, or just waiting for attention. Customers unsatisfied with the response to their complaints could decide not to tip, or not to come again, or both.

 
At 12:23 AM, October 14, 2015, Blogger Tibor said...

Jessa Mittleman:

The same pattern also exists in Rome (probably also other parts of Italy). In fact, there are three prices - one for sitting outside (the highest...but obviously only during summer and sunny days), one for sitting inside and one for just buying a coffee and drinking it at the bar while standing. The difference in price is quite large. If you are fine with drinking your coffee at the bar, it can be as low as 2 euros for an espresso, while the same drink costs you more than 5 if you sit outside.

It seems that when the seats are sufficiently scarce and valuable, the owners make you pay for them. I am surprised that this is not more common, though. During summer (not just in Italy and France), you often have the seats outside fully occupied for most of the day and the inside basically empty. As long as the staff can still manage to serve everyone even if you are totally full, it seems like a good idea to offer lower prices inside during summer. Then you don't end up with all outside seats occupied and nobody inside (people rather just go to another café to sit outside instead).

 
At 5:07 AM, October 14, 2015, Anonymous Anonymous said...

I would guess that food sold by weight rather than plate would generally be food that can be prepared in bulk, so that the 'cook/chef' cost becomes less important than the volume cost.

-excel

 
At 5:12 AM, October 14, 2015, Blogger Mike Hammock said...

I don't think this is correct: "In the U.S., if you are in a big building selling clothes or groceries, a department store or a supermarket, the people selling them to you are employees of the firm that owns the building."

In the U.S., shopping malls and strip malls are organized like the businesses you describe in China: A company owns the building, and leases it to to the various businesses. The employees work for the tenants, not for the building's owner. Even big box stores are often leased from a strip mall owner. Shopping malls are not as popular as they once were, but strip malls are still going strong. Instead, I think the remarkable thing about the organization you describe in China is the failure to organize tiny stalls into coherent larger businesses--a vendor for nails and a vendor for hammers, rather than both of them being sold in a larger store like Home Depot. Similarly, there are food courts in U.S. malls that have a variety of vendors selling foods, but I suspect there are fewer of them than in the Chinese markets you visited. Maybe the fixed costs of setting up a business are larger in the U.S., resulting in fewer tiny firms.

 
At 6:17 AM, October 14, 2015, Blogger Foo Quuxman said...

CHerryberry sells frozen yogurt (and toppings) by mass.

 
At 7:08 AM, October 14, 2015, Blogger Joe said...

If you go to Miami, Florida, you'll find many restaurants that sell food by weight like in Brazil (of course, they're not exactly "American", the practice I believe comes from Cuba and possibly other places in Latin America and the Caribbean). Another puzzle: I'm surprised you didn't see or mention Brazilian "rodizio" where for one flat price you can eat all the meat you can handle, with several waiters walking around, bringing the pieces to your table and cutting them right there. You can find some of those types of Brazilian restaurants in Miami also and in other larger cities.

 
At 9:27 AM, October 14, 2015, Anonymous Chris said...

Any restaurant in the US that caters to both take out and eat in (with service) in effect, charges for the privilege of eating in. It is expected that those that are eating in are to leave a tip.

 
At 10:49 AM, October 14, 2015, Blogger Alia D. said...

I agree with Richard that part of the micro store phenomenon is about avoiding regulation. I've seen the same thing in the Philippians and in addition to lack of business licences there was evidence of practices that facilitate sales tax evasion.

There is also the fact that there is a substantial bargaining culture in operation. Many customers seek out venues were they are encouraged to try and haggle over price. And in a bargaining situation the sales persons's interests have to closely aligned with the owners in a way even sales commissions have a hard time fully capturing. But the small stalls tend to be staffed by the owner or relatives and close personal friends of the owner. Since owners have a limited circle of such sales people it puts limits on expansion for this type of business.

 
At 12:46 PM, October 14, 2015, Anonymous LH said...

I can think of a number of similar examples in which, lacking certain costs imposed in gathering the relevant information (e.g. duration at the table), pricing might be structured differently. One that I first considered a few years ago I have now seen first hand - a bar that prices its drinks dynamically based on remaining supply and current demand (within a night at the bar). The cost of constantly checking supply and monitoring demand in that case is overcome in part using a point-of-sale system.

The example that has baffled me for at least ten years is the one of movie theater pricing. True, theaters have difference price levels for 3D or matinee showings as opposed to regular evening prices, but why not price each film based on its demand? I suspect that at this point - likely for several years already - the great majority of movie ticket sales in the US are done electronically, which should make adjustments easy. Moreover, pricing wouldn't even have to be adjustment based on immediate supply/demand in theater auditoriums (although that's another option), it could simply be adjusted on a daily or weekly basis based on a film's performance relative to others.

I suspect that one reason this practice has not been adopted relates to the way contracts operate between theaters, film studios, production companies, etc. Even so, I can't fathom how they could not be adapted in the long-term.

 
At 3:21 PM, October 14, 2015, Anonymous AbsoluteZero said...

David,

One example of a "restaurant" that sells food by weight are the cafeteria of a large US company (a Dow 30 component). They usually have three sections. One has prepackaged food in boxes. They scan the boxes at checkout. The other has counters where they cook what you want right in front of you. You get a small slip of paper. At checkout they scan that slip of paper. The third section has lots of ingredients, and standard size plates. You put things on the plate or plates. At checkout you pay by weight.

Also, as I've mentioned in a comment some time ago, places that charge for food and time separately exist, but they're not exactly restaurants. Mainly found in Japan, there are two types. First, karaoke places. You rent a room by the hour, so mainly it's time-based. Some snacks and drinks are free, others you order. Some people order little or no food, and just sing, or do other things, like have a private meeting, or sleep. Others might order a lot of food, but stay just long enough to finish their meal. These people are using it mainly as a restaurant, where you get a private room. They pay mainly for the food. Some high-end places are like hotels, where you get a private bathroom with a shower. Some people use those purely as love hotels. So even though it's supposed to be karaoke, many people don't use these places to sing, at all.

The other type are the net or manga cafes. Some places are both. You go and get a booth or room. Again, mainly you pay by the hour. Some foods and drinks are free, others you order. You can get a private room, order food, eat, and leave, without using the computer or read any manga. In this case it's a restaurant, and you pay mainly for the food. In some cases people rent a room overnight (it's cheaper if you rent a larger block of time), and order very little or no food. In this case they're using it more like a hotel and pay mainly for time.
There are many variations of both.

 
At 6:32 PM, October 14, 2015, Blogger Nancy Lebovitz said...

Philadelphia also has the Reading Terminal Market, a very large building with many vendors who have their own space in it-- mostly but not entirely food vendors.

 
At 2:46 AM, October 15, 2015, Anonymous Anonymous said...

London has quite a lot of buffet type setups which sell food by *volume* rather than weight or by item.

You take a container and as long as you can close the lid it costs a fixed price whether you fill it with meat or fill it with potato.

Re: Small buisness owners I think there's some additional elements. The UK has Sunday opening hours. On sunday shops larger than a certain size or with more than a certain number of employees are only allowed to open for something like 5 out of the 24 hours of the day.

There's been occasional pushes to do away with it but some of the most die-hard opponents of the change are the small business owners because they're immune and they get a hefty chunk of their business on Sundays when their competitors have to close. I imagine any attempt to make it easier to run larger businesses in china would meet massive opposition from the majority of small business owners.

I think there's some cultural aspects as well. All-you-can-eat restaurants are very rare in Ireland but common in the US and UK. From talking to someone who used to work in one which shut down in Ireland the reason given was that almost everyone took it as a personal challenge.

Another question re, restaurant seating: restaurant owners know that people are more likely to go into a place where there's already a few people eating. If you go into an empty place they'll almost always seat you at the window to try to attract more customers. There is an additional gain from getting the first few people in the door while a crowded restraunt with a line should be able to charge a premium.

Why then don't many restraunts offer discounts to the first few people to sit down when it's empty or increased prices for people coming in when there's a line down the street?

 
At 5:10 PM, October 15, 2015, Blogger George Haley said...

The Royal Grill Buffett has a per pound pricing on to-go food. I think they charge you another dollar or something for sushi.

 
At 11:58 AM, October 16, 2015, Blogger Mike Brady said...

Your description of those markets make me think of a Hispanic Mall in Atlanta -- Plaza Fiesta. When it opened in 1968, it had larger retailers that were typical of a mall of that era.

Today its main area has medium to small shops, but down its side alleys and running parallel to the main area are numerous little booths run by individual merchants.

Why would this be more common among the Hispanic immigrants?

Perhaps we would see those kinds of shops among American populations if zoning regulations did not prevent it?

You can see the main walkway here, though it is difficult to peer down the more interesting side alleys:
https://goo.gl/maps/KKZuu2pjjAL2

 
At 3:39 PM, October 21, 2015, Blogger Alex said...

There is an excellent Planet Money episode about this very issue.

 
At 1:51 AM, October 27, 2015, Anonymous Yogish said...

I think I might have an answer to the first puzzle.

In the United States, it is comparatively easier to access credit and to hire and fire people. So, it is comparatively easier to grow from a small business into a medium-sized one.

In India and presumably China, things are different. It is quite easy to start a small mom-and-pop store, but you run into a brick wall of corruption and regulations if you want to grow beyond this size. So, businesses usually stay small. You can grow larger only if you are politically connected.

This creates an interesting dynamic....... The small store owners might be individually powerless, but collectively, they have some nuisance value from the point of view of the politicians. They cannot change the system, but merchants' associations will go on strikes, riot and make trouble if the big politically connected businesses start encroaching on their market.

So, a compromise is reached. The politicians invest their ill-gotten gains in real estate and let the small store owners lease/rent it from them. Both are happy (atleast until a new disruptive force enters the equation... for instance, e-commerce powered by cheap smartphones).

One quick way to further test or immediately discard this explanation is to find out who owns these big buildings...



I am very puzzled by your second puzzle. I have seen books being sold by the kilo (which made perfect sense because they were mostly pirated :))..... It would make sense if all the food stuff being sold is of roughly equal value per unit mass, but it isn't so for the stuff you mentioned. So, it is extremely puzzling.

 
At 7:14 PM, October 31, 2015, Blogger Gustavo Schneider said...

Please save us from Dilma, help us to kick out her socialist government!

 
At 3:27 PM, November 06, 2015, Blogger Anthony said...

Michael Dolbear points out that many department stores in the U.S. have specialty counters that are actually separate businesses which rent space from the larger store. This also happens in some grocery stores - the nearest one to my house has a meat counter which is a separate business from the general grocery store.

There's also the trend of Starbucks popping up inside any business large enough to house a Starbucks.

 

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