Yesterday, we posted a Q&A with economist and all-around smart guy Steve Landsburg, who addresses a lot of everyday riddles in his writing. Sometime in the next few days, we’ll be posting excerpts from the economist Robert Frank‘s new book The Economic Naturalist. So far, I am loving Frank’s book. It poses a series of questions about small, real-world riddles, most of them asked over the years by his students. The questions are great, and so are the answers.
So, in tribute to the Landsburg/Frank school of everyday questions, let me pass along this e-mail from a reader named Martin Seebach. Maybe you can answer his question:
Every few months I like to take my girlfriend out to a higher-end restaurant and have a nice dinner. While the price of food items seems to be closely related to cost of food in the dish (e.g. , a 12-ounce steak dinner is maybe 30% more expensive than the 6-ounce dinner, not double or more, as both include the same side dishes and sauce), the markup on wine is extremely high, and progressive.
Depending on the place, wine by the bottle has at least a 200% markup, and that markup seems to be constant as the base-cost of the wine rises. This means that I will typically choose the $50 bottle over the $70 bottle, and definitely over the $120 bottle, even though the difference in base cost to the restaurant is maybe only $7 and $25. Had they offered me the bottles at $50, $60 and $75, I might have bought one of the more expensive ones, and (a) made the restaurant a larger profit at almost the exact same cost (not counting the added cost of having the more expensive inventory); and (b) been much happier, drinking the better wine, and more likely to come back.
Am I not seeing something here?
How true do you find Seebach’s observation, and how do you explain it?
I do believe that a high wine price is, to a certain kind of customer, a valuable signal to your dining partner/s that you are (a) knowledgable about something as important as wine; and (b) able and willing to spend a lot of money on something that will (c) impress the partner/s.
UPDATE: Here’s what Frank has to say on the topic, from his book Microeconomics & Behavior:
Similar pricing strategies affect recovery of the costs of variety in virtually every industry. Consider again the restaurant industry. In a city in which most people have cars, which is to say in virtually every city, the cheapest way to provide restaurant meals would be to have a single restaurant with only one item on the menu … But people don’t want the same meal every night, any more than they all want the same kind of car …
How are the extra costs of all this variety apportioned? Most restaurants price the different items on their menus in differing multiples of marginal cost. Alcoholic beverages, desserts, and coffee, in particular, are almost always priced at several times marginal cost, whereas the markup on most entrees is much smaller.