The vegetarian cross-subsidy

On the Freakonomics blog there is a discussion of why a delicious vegetarian option at a restaurant was cheaper than the meat options:

Was it because his revenue from it was only €63 compared to €91 for a five-course regular menu (which had one meat and one fish course)?  Maybe. But I don’t believe the vegetarian menu used less labor, nor was there a €28 difference in materials cost. My guess is that he prices at mark-up over materials cost, thus making the veggie menu a relatively good deal for the customer—and a relatively bad deal for him. Another possibility is that he thinks vegetarians have lower incomes and higher demand elasticities, and he believes he is rationally price discriminating.

All fair explanations.  However, I’m not convinced by them, as this is an expensive restaurant where the relevant sample of vegetarians will be wealthy.  Furthermore, given they can’t “substitute” to another meal this surely indicates they should be charged more!

I have a simple explanation – cross-subsidisation.

When there is a large upper-middle class group going out to eat there are generally lots of meat eaters, and very few vegetarians.  However, the existence of us pesky vegetarians means that the group has to go to a restaurant that serves vegetarian food.

If we then assume that vegetarians have better knowledge about where the vegetarian food is – they will essentially be the ones deciding which restaurant to go to!  As a result, restaurants will cut the price of vegetarian meals and increase the price of meat ones in order to get the groups to come – and then extract rents.  Huzzah.

For me, this suggests that table bills with vegetarians should be split evenly – if you can get past the issue of over ordering ;)

  • http://www.tvhe.co.nz jamesz

    As I understand it you’re saying that every vegetarian is taking advantage of me when they pay for only their meal. That confirms my suspicions!

    • http://www.tvhe.co.nz Matt Nolan

      I have tried to hide it for a long time, but now I figured I need to be honest.

      I mean, I’ll just pay for mine as I only got the aloo gobi

  • http://www.tvhe.co.nz agnitio

    I can’t wait till we go out for dinner and I suggest we split the bill to compensate me for cross-subsidizing your meal!

    • http://www.tvhe.co.nz Matt Nolan

      To be expected – however, I will be sure to increase my beverage purchases given that the private costs associated with a split bill is now lower than the social cost ;)

      • http://www.tvhe.co.nz agnitio

        I will make sure to match you drink-for-drink…wait, this could get messy….

  • http://billbennett.co.nz Bill Bennett

    “ I don’t believe the vegetarian menu used less labor”

    Don’t agree, it’s hard to be as fussy with vegetables as with meat, have you ever tried to bone a duck? Cutting bits of cheese and lettuce is miles easier. 

     

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