Friday, January 28, 2005

Economists love this kind of question 

Chumley wonder(bar)s:
Something that struck me as an interesting idea while I was having lunch today (Slim Fast and a salad, yeah!!!) was the following. If you take items off when ordering a food, why don't you get a discount? For instance, I got a salad today at Arby's, but I didn't want chicken or cheese. Since these would strike me as being two of the most expensive ingredients on the salad, shouldn't they offer me even a small discount?
The answer is "no". One possible reason is that the salad was already made with chicken and cheese, mass-produced at lower cost. The act of picking off the chicken and cheese is then an added cost. (Why then don't they charge for removal? -- ed.)

I think a second possible explanation is that bundling lettuce, tomato, chicken and cheese allows the owner to create more net revenues.

This is a variant on the question: Why can't you order your cable or satellite TV channels a la carte? Why do you buy them in bundles many of which you don't want? I buy a premium package for BBC America, Bloomburg and MSNBC. There are eight other channels in that package I do not want even at a zero price. Why do I buy the package? Because the value of the three I want is greater than the cost of the eleven I buy. Likewise, the value of the salad is greater than $5 to me, so inducing me to pay for the chicken and cheese when I don't want them transfers additional profits to Arby's that would not be gained if they allowed me to build a salad with a la carte pricing.

This is more likely with products which for which consumers are not responsive to price changes very much (relatively inelastic demand, an economist would say), and for which competitors can be found only at some cost. Chumley did not bang the counter and say "What? Pay for chicken you removed for me? Off to a Wendy's!" It wasn't worth the effort to him.

Other explanations? Comments!