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