True cost?
In Moscow, there exists a restaurant chain that uses the following pricing mechanism.
A consumer must pay some entrance fee, after that they can order whatever they want for the price that is equal to the cost of ingredients. The price of an entry ticket depends on the time of the day (being higher in the evening than in the morning), but prices of menu items remain the same and are very low for Moscow standards.
For instance, a portion of pasta costs only about $2–2.5, the price of a ribeye steak is about $4, a burger with grilled tiger prawns and arugula can be purchased for merely $3. For only $3–4 a customer can drink a glass of decent wine. These prices are very low compared to other restaurants in the city. Customers must eat and drink inside; if they want to take something away, the price doubles.
a) (15 rp) One of the well-known models of price discrimination explains how similar pricing scheme can be profitable for a seller (for instance, in Disneyland entrance fee is high while using most of its facilities is free). Using this model, explain, how such pricing technique helps this restaurant maximize profits (use graphical analysis where appropriate).
Two things are important here:
1. Different entry fees for different times of the day. This works because in the evening and at night people are ready to pay more in restaurants. This is because they most likely want to have a fancy dinner with vine etc. rather than a small breakfast that they can otherwise (if prices are high) cook at home. Similar things are sometimes called a third-degree price discrimination.
2. Entry fee by itself. This pricing is sometimes called two-part tariff (second-degree price discrimination) and the logic behind it is as follows. If the restaurant use a simple linear price (that is, some fixed amount per meal without any other fees), he has a dilemma. If the price is way higher than marginal cost, profit per meal will be high, but the restaurant will undersell, thus leaving some potential profit unreceived. On the other hand, low linear prices close to the marginal cost will allow to sell many meals, but each meal will bring little profit, leaving the surplus to the customers.
Two-part tariff is a solution: thus the restaurant can make prices of single meals low (close or equal to marginal cost) and make consumers buy more of them. Simultaneously, the restaurant can remove the surplus from the customers via entry fee. Effectively, the more meals a consumer buys in the restaurant, the cheaper they become on average (because of the fixed entry fee).
b) (15 rp) While such a scheme is successful in the theme park industry and restaurant business, we don't see supermarkets or clothes shops pricing this way. Explain why.
The crucial feature of the restaurant is that a customer must consume meals that he ordered inside. Note that if a customer wants to take something away, the price doubles — this was sort of a hint in the question. In a supermarket or a clothes store consumers would cooperate to pay entry fee only once and buy a lot of stuff. In a restaurant where you have to eat inside it is impossible.