At some point, everyone's left a restaurant feeling ripped off. The true cost of restaurant dining can often be fuzzy at best, confusing and frustrating at worst. For diners, there's rarely any real rhyme or reason to the price of a meal, beyond the feeling that it either costs what it "should," or it doesn't. But how much should any given meal actually cost? Welcome to Gastronomics, where, each month, Felix Salmon will break down the economics of eating out. In our first edition, he wonders: Why do people flock to restaurants that treat their customers like crap?
Dining out should be a pleasurable experience. But why does it often feel as though it's all about pain? In a weird inversion of service culture, the most popular places to eat are increasingly the venues that do the best job of maximizing discomfort, inconvenience, and noise.
AA Gill does a masterful job in this month's Vanity Fair exposing Paris's hugely popular L'Ami Louis as "the worst restaurant in the world," a haven for bad food, exorbitant prices, and atrocious service, which is nevertheless packed full of people. "Why do Americans and English come here?" Gill asks. "The only rationally conceivable answer is: Paris. Paris has superpowers; Paris exerts a mercurial force field."
Gill is funny, but he's wrong about this. In fact, what's going on here has very little to do with the mercurial pheromones of Paris, as a glance at overpriced restaurants all over the world will attest. Are there compelling cultural connotations driving people to, say, Harry Cipriani?
These restaurants have perfected the art of creating Veblen goods items where demand increases as the price goes up. In this rarefied world, high prices are a feature, not a bug; they're status symbols that alert others to the fact that the patrons can pay $26 for something as basic as a spinach salad. They also serve to keep out the riff-raff. If L'Ami Louis cut its prices so that they were commensurate with the quality of the food and service, no one would go there anymore.
What's interesting about the latest bout of culinary masochism, however, is that it's taking place at sub-luxury levels where Veblen goods have historically been very hard to find. L'Ami Louis and Harry Cipriani might have bad service in reality, but at least they aspire to providing the best service in the world. Further downmarket, by contrast, as Diane Cardwell reports, "New York has spawned a breed of hard-line restaurants and cafes that are saying no." Chefs are refusing customer requests, even as they ask higher prices for traditionally low-cost food. At Burger King, a Whopper costs around four dollars, and you can famously "have it your way." At the Spotted Pig, a burger costs $17, and you will have it their way, or not at all.
Saying no is bad service; it boosts the egos of the restaurateur and chef, and makes the diner feel snubbed and unhappy. It also signals to the customer that they will have to bend to the will of the restaurant, not the other way around. So why do restaurants do it? What's the economic justification for upsetting your customers?
To help answer that question, get a falafel from the Taïm Mobile truck in midtown one day. Try a Wednesday, on 51st Street between Sixth and Seventh Avenues. Chances are the line will be an hour long which means that for the midtown office workers getting their food, the amount of time they spend waiting for their lunch will be significantly more valuable than the falafel platter itself, which is priced at $9.50. Standing in an interminable line for a falafel is no one's idea of fun there's a real cost to that wait. But hundreds of people suffer it gladly every day.
Of course, it's not just trendy food carts that require inordinate amounts of waiting around. Popular restaurants like the Spotted Pig or Momofuku Ssm Bar have never taken reservations and can easily ask would-be diners to wait well over an hour before they're likely to get a table. It's here that the concept of being overpriced overlaps most clearly with the concept of bad service: New Yorkers' time is valuable, and they waste far too much of it at restaurants that refuse to seat them at the time they want to be seated.
Economists call this a negative externality: The amount of extra money that the restaurant makes by always being full and never saving tables for customers is lower than the cost to its customers of waiting to eat. So from an overall cost-benefit analysis, the policy doesn't make sense. From the point of view of the restaurant, however, the customers bear the extra costs while the restaurant gets all the benefit so it goes ahead and implements a no-reservations policy.
But here's where the economic model breaks down. In theory, a no-reservations policy creates, in economic terms, a huge price hike for the restaurant's customers: The cost of their wasted time and increased inconvenience has to be added to the amount at the bottom of the check. Such a policy should therefore result in less business for the eatery in question. In practice, however, things seem to work the other way: The more that a restaurant makes its customers wait, the more popular it becomes.
If we're not talking about luxury Veblen goods here and, clearly, we aren't then what explains this phenomenon? The answer comes from an internalization of other economic concepts. First of all, there's the idea that if something is selling out, it's underpriced. There's an hour-long line for falafels? In that case, they must be a bargain! People are waiting for over an hour to eat at Al di Là or Shake Shack? That must be an indication of quality!
What's happening here is that restaurants are making their popularity visible and turning it into a signaling device. If you take reservations and you're very popular, all that happens is that it becomes harder to get a reservation. If you don't take reservations and you're very popular, then everyone can see how popular you are and all those people are likely to be curious as to what all the fuss is about. (David Chang figured out how to make a reservation policy a signaling device, too: Every time you log on to Momofuku Ko's reservation website, all those red X's remind you just how popular the restaurant is.)
There's also a behavioral-economics perspective to this: The more you invest into something, the more you tend to get out of it. That's why expensive wine tastes better than cheap wine, even if you would have preferred the cheaper wine in a blind tasting. A $79 foie gras appetizer in Paris tastes that much better for being expensive. And once you've waited an hour and half just to be seated in a restaurant, you're going to be more excited to eat its food not to mention hungrier.
Even when you're aware of the phenomenon, you can't escape it. One of the best meals I've eaten in the past year was at Vij's in Vancouver, a spectacular Indian restaurant with a no-reservations policy and a permanently long wait to get in. Would I have appreciated the meal as much if I'd been able to saunter into a half-empty restaurant and get served immediately? Quite possibly not. The quality of the food more than justified the two hours I invested waiting for a table. But at the same time, the two hours I invested waiting for a table probably also improved the perceived quality of the food.
Felix Salmon is the finance blogger at Reuters.