Internal Code: 4AFE
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“A popular seafood restaurant in Palo Alto does not take reservations, and every day it has long queues for tables during prime hours. Almost directly across the street is another seafood restaurant with comparable food, slightly higher prices, and similar service and other amenities. Yet this restaurant has many empty seats most of the time Why doesn’t the popular restaurant raise prices … ? … successful Broadway plays do not raise prices much; instead they ration scarce seats, especially through delays in seeing a play … The same phenomenon is found in the pricing of successful sporting events, like the World Series and Superbowls, and in a related way in the pricing of best-selling books.” Extracted from: “Becker, G. S. (1991). A note on restaurant pricing and other examples of social influences on price. Journal of Political Economy, 99(5), 1109-1116.”
(1) The author asks: “why doesn’t the popular restaurant raise prices?” Based on your understanding of the notions of demand and supply, why would you expect the popular restaurant to raise its prices? Similarly, why would you expect the restaurant with empty seats to lower its prices? Illustrate with use of an appropriate graph.
(2a) If a seller in a perfectly competitive market were to restrict the quantity it sold in the shortrun, what would happen to its profits relative to the competitive equilibrium? Illustrate with use of an appropriate graph.
(2b) Do you think the restaurants described in the extract above operate in a perfectly competitive market? Do you think restaurants in general operate in perfectly competitive markets?
(3) The author suggests that queuing is the result of consumers enjoying having access to the restaurant when other people do not enjoy similar access; i.e. there is value from exclusivity (note: not mentioned in the extract above). Sellers therefore strategically choose to restrict the quantity supplied, while keeping prices low. For simplicity, assume the seller is a monopoly and use an appropriate graph to show the potential gains and losses to profit if the seller chooses to restrict the quantity supplied under the ‘value from exclusivity’ assumption above.
(4) Another explanation for why queues may exist is so restaurants can practise price discrimination, which is sometimes illegal. By restricting the quantity supplied, the owner can adopt ‘behind the counter’ or ‘not on the books’ policies that give priority seating and special bookings to customers who are willing to pay more. In addition, because these payments are not on the records the owner does not pay taxes on them.
a) With the help of an appropriate graph (for simplicity, assume the seller is a monopoly), show how a firm can profit by restricting the quantity it sells (while keeping the legal price the same), while practising price discrimination with a subset of consumers.
b) Price discrimination can sometimes be considered anti-competitive, and sometimes pro-competitive. Suggest why this might be the case (hint: reading on the history of price discrimination in Australian Law may help).
(5) The demand curve does not always behave in a simple way. Consider house prices, the price of gold, the price of company shares/stocks etc. Do you think the law of demand generally still holds in these instances? How will the demand curve today shift if consumers expect that demand for the product will increase in the future? In addition, consider what happens if consumers are uncertain about how prices will change in the future, and instead use a change in price today as an indicator of how price will change in the future?