Markets in everything: randomized pizza prices

by on December 10, 2009 at 7:27 am in Food and Drink | Permalink

Sébastian Turben writes to me:

It's about a restaurant where at the end of your meal, you roll 3 dice, and if you get the combination 4-3-1 you don't have to pay…I guess what makes it work is that people will tend to eat more/more expensive that what they usually do, thinking that the proba[bility] of not paying is not that small…

The link, in French, is here.  I take this as evidence against the view that people systematically miscalculate expected utility in repeated, real market settings.  If they did, you would expect to see commercial lures like this much more often.  Maybe in mortgage markets, or credit card markets, people are overoptimistic about the bad (too many floating rate mortgages or too many people accepting the risk of high default fees), but I don't think in pizza markets they are overoptimistic about the good.  A restaurant which makes this kind of offer, of course, has to charge systematically higher prices, the greater the customer's chance of winning the lottery,

Addendum: Jeff Ely considers a related example.

Meds December 10, 2009 at 8:39 am

This reminds me of the gamble that Kohl’s customers take during checkout when their credit card holders receive a scratch off. They have the chance at 15%, 20%, or 30% (I guess 30% is the highest) off of the total price. The typical Kohl’s purchase most likely consists of $100+ on clothing and home goods so the shot at 30% discount is significant enough to motivate many customers to take such a chance.

Mo December 10, 2009 at 9:27 am

I wonder if this could backfire on the restaurant. For the vast majority of the customers their experience ends with a loss, a letdown. It gets their hopes up which makes it harder when they lose (other places you expect to pay no matter what).

The difference with the Kohl’s example above is that you always get something off – so you still feel like a winner. Here most people will leave with that bad feeling of having to pay for more than they wanted.

The Duke of L.A. December 10, 2009 at 10:19 am

Citibank has an entire advertising campaign built around the fact that they pay for a random debit card transaction every hour.

Chris D December 10, 2009 at 11:01 am

“I take this as evidence against the view that people systematically miscalculate expected utility in repeated, real market settings.”

I think you severely mis-estimate both the power of cultural norms (how many things in that culture have randomized prices?), and the willingness of people to allow any system that requires explanation–I think of discussions about changing the U.S. presidential election into something sane.

Bill December 10, 2009 at 11:22 am

Do they roll the dice before the meal or after it. Could have people walk out, or order differently, depending on the time of the rolling.

A better approach is to give the customer a frequent diner card with a space for twelve holes, two of which are prepunched the first time, and one added at the end of the meal. What happens is that people have “something to lose (those two earlier free punches)” if they do not continue eating at the restaurant. You, as economists, would recognize this as a ten hole card, but the patrons are not economists. Fear of loss works better than hope of gain. What happens is that the “free” two holes are of no value unless you continue, and people are adverse to losses more than incented to gains, ala Thaler.

Dan December 10, 2009 at 12:10 pm

I take the fact that these types of lures are rare as evidence that people typically don’t trust businesses with strange, gimmicky pricing schemes.

Ryan Vann December 10, 2009 at 12:54 pm

Sounds right to me Peter (except I come up with 2.8%), unless order matters. In which case, the odds are much less attractive at (1/6)^3 from the patron perspective. From the description of the game though, it sounds like order doesn’t matter.

Seems to me, if roughly 3% of your patrons are leaving the place with a free meal, your boost in sales must at least be greater than 3% to profit. You’d have to boost prices by a small percent if increases were even.

David Heigham December 10, 2009 at 1:31 pm

To maintain or increase profit, the restaurant does not necessarily have to increase prices. Provided there is empty chair space, the marginal costs of delivering an extra pizza are confoundedly low.

anonymous December 10, 2009 at 9:02 pm

Sébastian is apparently not a French speaker (or reader). From the article, the actual winning combination is 4-2-1. The “431” throw is mentioned only as a scary close call the restaurant owners experienced after a group of diners ran up a 500-euro bill.

The article also mentions that the restaurant only does the dice-throwing promotion on Mondays, Tuesdays and Wednesdays, which (it says) are normally slow days for them. It also mentions that business is slow in general and the scheme gets the pizzeria talked about locally by word of mouth.

There could also be an additional benefit in such a scheme for sit-down pizza places that also do home delivery. Such places might heavily advertise a phone number using a jingle on radio or TV, say 421-PIZZA, which a dice-throwing promotion could help reinforce. However, the article makes no mention of any such thing.

Lord December 11, 2009 at 2:07 pm

Charge systematically higher prices? I disagree. All businesses advertise. That some may choose to advertise this way rather than another does not mean they face higher expenses. Or do you only patronize businesses that don’t advertise?

bgreen December 12, 2009 at 4:11 am

one of the comments on the laprovence.com site raised the issue (no one here mentioned) of the tax issues.

effectively there are two transactions
1. purchase of a meal
2. purchase of a wager on roll of the dice

so should the pizzeria owner pay tax on the revenue or the wager? i expect someone on here can parse this one and realign the utility with the 3rd stakeholder – the taxman

Note to david welton. if you knew anything about the south of france (yes thats where marseille is) then pizza would not seem odd.

Esben January 10, 2010 at 7:23 am

The solution is (1/6)^3*3!

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Charge systematically higher prices? I disagree. All businesses advertise. That some may choose to advertise this way rather than another does not mean they face higher expenses. Or do you only patronize businesses that don’t advertise?

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The typical Kohl’s purchase most likely consists of $100+ on clothing and home goods so the shot at 30% discount is significant enough to motivate many customers to take such a chance.

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2% chances that you can eat and drink for free? I am sure the owner has at least 20-30% more costumers after this promotion has started.

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