June 18, 2011
The Economics Of : All You Can Eat Buffets
I’ve decided to begin a Saturday feature in order to collate my various economic articles into a structured series rather than have them scattered at irregular intervals.
The “Economics Of:” will analyse facets of everyday life from an economic perspective to show people’s motives and reasoning for different actions and decisions.
The first topic that I have to discuss is that of all-you-can-eat buffets.
Most people fall into two schools of thought when they decide to opt for eating at a buffet. One group of people want to have a nice relaxed meal with regular portions and maybe one or two trips up to the buffet station. These people are unlikely to eat food to a value equal to or above the price they paid for the privilege of the buffet.
The second group that people fall into is that of the over-eater. These people, with me included, will enter the buffet with a mission objective of trying to single handedly put the firm out of business through the volume of food consumed in proportion to the price paid. This group is more likely to consume food that is of a greater value than the price of the meal but due to the obscenely low quality and cost of most buffet food this may or may not be achievable.
Buffets work on the principle of the law of diminishing marginal utility which states that for every unit of a good consumed the consumer will gain less utility (satisfaction) from the next unit. This means that as more of a good is consumed the less that consumers will be willing to pay for additional units. Buffets make profit by charging a price which is above the price of the food that the average consumer consumes based on the assumption that the customer will be at point of zero marginal utility before they have consumed a quantity of food where the total cost to the firm is greater than the price of the buffet.
A fundamental mistake which the over eater group makes when at a buffet is that they fail to realise that the price of a buffet is effectively a sunk cost and therefore all they are doing is lowering their active fixed cost per unit of utility. A lot of buffets are savvy enough to charge a price that they know consumers will never reach in terms of the cost of food. As soon as a consumers utility for another unit of food reaches 0 they will stop eating and thus the price they would pay for more food would be 0.
As an example of this process let’s say that a random buffet customer consumes 3 plates of food. For the first plate of food they are reasonably hungry and so, if they were to be buying the plate of food seperately, would be willing to pay £3 for it. Moving on to the next plate of food, the consumer is likely to be less hungry and so is only willing to pay £2 for this plate even though the same food as the first could be present. The next plate is likely to be of less value to the consumer than the last until the value of the next plate is below £0. Buffets will charge a price around the value of the three plates to the consumer. This is generally well above the cost of the food to the firm and so reasonable profits can be made.
Consumers perceive that for their money they are getting an infinite supply of food and so are willing to pay a larger price than they would at an ala carte restaurant. The buffet supplier knows that the consumer will not be able to eat more than they would at an ala carte and therefore is laughing all the way to the bank.