Thursday, 2 May 2013

The Economics of an 'All You Can Eat' Buffet

Last Sunday I went with some friends to a Chinese ‘all you can eat’ buffet.  Once upon a time few, if any, thought such a concept could work, due to the problem of asymmetrical information (bear with me, I’ll explain).  But not only do Chinese ‘all you can eat’ buffets work, they are very successful.  About ten years ago I suggested to some friends that we should invest in Norwich’s first ‘all you can eat’ Indian buffet, because we’d make a healthy profit from it.  I knew with near-certainty that if we introduced one it would be a huge success.  Guess what?  My friends didn’t go for it, and later someone else did, and it’s now one of the most successful Indian restaurants in Norwich (if not the most successful). 

The problem of asymmetrical information is basically that the seller does not have enough information about the buyer to obtain an optimum price.  Car insurance is a good example; your car insurance company doesn’t know enough about you and your driving habits to obtain the optimal premium, so they assign a probability estimate based on a model that risk aversion is often commensurably correlated with low risk.  In other words, profits and losses are balanced out by the fact that the safest drivers happen to be those who have the most favourable cars, age, driving history, and hence, the lowest expected costs.

The problem of asymmetrical information for the Chinese ‘all you can eat’ buffet owner is that he doesn’t know whether his next customer is going to be a 25 stone man who can eat food twice the value of the dining price, or whether his next customer is going to be a 7 stone lady who can only eat food two-thirds of the value of the dining price.  Obviously, for ‘all you can eat’ buffets to be successful for the owners, the average amount of food consumed by all the customers must remain below the dining price, otherwise the restaurant will operate at a loss, and soon go out of business.  If the dining price is £8 per person, then those who can eat £10 worth of food would find it very worthwhile, but those who can only eat £6 worth of food would find it less worthwhile.

Purely on economic grounds, what should happen is that those who can only eat £6 worth of food would no longer dine there, leaving only those for whom the dining experience is a net gain.  But that couldn’t carry on, because the restaurant would then have to raise their prices up again to return a profit.  Then the smaller eaters would drop off (because the new prices are no longer a net gain for them), leaving only those even bigger eaters for whom the dining experience is a net gain.  And we repeat the process – the prices go up, more drop out, again and again, until the logical outcome is that the restaurant charges £30 (or something like that) and is only frequented by huge eaters consuming exactly £30 worth of food. 

That’s the prediction on paper, but of course, it suffers from a fatal flaw – there is more to the dining experience than consideration of consumption vs. price – particularly considering that all restaurants operate on a policy that the customers pay more for the meal than the value of consumption to the restaurant.  This is why I like Chinese buffets – we have a situation where just about everyone wins; for the restaurant, the average amount of food consumed by all the customers remains below the dining price, there is a good deal for the customers who can consume more than the value of the dining price, and even those who consume under the dining price have benefits that make the experience worth their while.  Those small consumers (this also applies to the big consumers) do not have to wait for the order to be taken and the food to be cooked, they get to eat a larger variety of food than a single dish served in a standard restaurant, and they have the option of consuming more than usual if they had underestimated their hunger.

All you can eat buffets are great little ventures, because society is full of people who love quantity over quality eating; it is full of people for whom an all-you-can-eat dining price of £8 seems like a better deal than £8 for a single dish at a standard restaurant; and it ideally caters for the numerous people who once in a while prefer the good value quantity over quality option.  All of the above is enough to see to it that the restaurant will consistently make a profit on its average customer, as they far outweigh (not literally of course) the huge eaters. 

Damn, if only we’d have started that Indian ‘all you can eat’ buffet ten years ago!