Monday, October 8, 2007

More Beeronomics

Over on the Beervana Blog's 'Honest Pint Project' some commenters have pointed out that the under-pour (or "profit-pour" in a lexicon that is new to me) is just as insidious as the cheater pint if not more so. To this I replied that the under-pour is a full-information market phenomenon to which an immediate reaction can be made (leave no tip*, do not buy another, do not return, tell your friends, etc.). Market efficiency should result. Why I have such a distaste for the cheater pint is that most customers do not know they are being served substantially less than a pint. Market efficiency will not result.

But anyway, in the comments section John Foyston of The Oregonian mentions that as hops and malt prices increase (as they have been doing and are expected to do so in the near future) the practice of under-pouring may become epidemic. Which got my little head thinking - why would a business under-pour and not simply raise prices? One answer relies on the unsuspecting customer who doesn't know they will be given a not-full glass. The problem with this argument is that I believe that for most pubs the customer who shows up once on a whim and never returns again is a relatively small portion of their overall business. Most customers of a pub will have more than one beer in a visit, will visit repeatedly and/or will go based on a recommendation from a friend. In the economics parlance (as I know you are dying to know) a pub beer is an experience good - one which you don't know the quality before you try it, but after you are likely to be a repeat customer if it is a good one. So preying on uninformed customers is probably not a good strategy.

Perhaps the answer lies in the concept of "sticky prices." First, some background. Economists have for a long time understood two things: One, Keynes was theoretically wrong, but his theories do a remarkably good job making sense of the real world macro-economy. Two, that modern macro theory seems completely right, but does a terrible job explaining what we see in the real world. (And here insert your own favorite economist joke about how economists don't really know anything) So economists have searched for the modification to macro theory that will reconcile it with reality. (physicists have superstring theory - economists have sticky prices) To give but one simple example, why do we have unemployment? When macroeconomic conditions deteriorate, why don't wages instantaneously lower to restore equilibrium between supply and demand for labor? Well, many or most wages are not allowed to change instantaneously because they are set by employment contracts, turnover is costly to firms so they hesitate to lower wages, etc. So wages are a sticky price (wages being the 'price' of labor) and with this incorporated into modern macro theory - it works! There are lots of this type of example, prices set in contracts between suppliers and firms, prices that are posted and printed in may forms that are hard to change (think about bus fares as one example) and - yes - even menus themselves.

This last example feels a bit stale in this era of personal computers and laser printers, but there is still a cost to restaurants that comes from changing prices that makes them reluctant to do so too often. (It could also be that they are afraid of annoying frequent customers) So what does a restaurant do in the face of increasing cost of ingredients? One strategy is to start cutting down on portions. Thus, with hop and malt prices on the rise these days, the best advice when one enters a brewpub is caveat emptor!

*This is going to be my strategy, because from my restaurant experience I know that if servers start complaining to the bartenders - problem solved. Bartenders hate nothing more than to have servers barking at them.


Jeff Alworth said...

This phenomenon explains why grocery-store packaging for common staples has shrunk, I guess--you don't raise the price, you sneakily reduce the size.

However, while pricing is an issue for retailers, I don't think that's principally what's driving the use of shaker pints. They are sturdy, stack well, and last a long time. They have been so common for so long--all the while being called "pint glasses"--that I suspect the vast majority of restaurants and pubs don't know they are 14 ounces.

Here's an economics question: since the pint pulled at a brewpub cuts out the distributor, does this give brewpubs extra flexibility with fluxuating prices? For a regular tavern owner, the beer has been through two sales already, before it goes to the guy on the barstool (from the brewery to the distributor, and from the distributor to the retailer). Presumably, if you can brew beer in a cheap enough operation, you have a sizeable advantage.

Or do economies of scale kick in and foul up my pretty hypothesis?

Patrick Emerson said...

Well, economic theory suggests that in the vertical supply chain and imperfect competition you will get something called "double marginalization" a fancy was of saying everyone takes a cut and the product gets more expensive for the end consumer. I can't really say about whether it gives pub owners more flexability, as it seems that in general beer on tap is generally sold more cheaply than bottles. (Anyone know if margins are bigger for taps?) I would assume so. But you are also right about economies of scale, I suspect.