Around dinner time, it is not uncommon to see a queue in front of your favourite restaurant in Melbourne. The wait, in some cases, can be up to half an hour. The question here is: what tools would an economist use to address this problem? (Let’s accept for now that it is a problem, unless you love waiting for your dinner for 30 minutes at times.)
The central idea in the study of economics is the notions of supply and demand. The premise of this idea is that in a well-functioned market, a price equilibrium is always established. That is, if there is more demand than supply of a particular goods, the price should increase until an equilibrium is reached. Why should this happen? An assumption used here is that as the price increases, less buyers are willing to complete the transaction at the new price and therefore lower demand. Conversely, if there is more supply of goods, then the price should drop to match the demand.
The key requirement is a well-functioned market. For any restaurant, there are transactions between buyers of meals and the owners at the prices set by the restauranteurs, and hence it forms a little market. However, it is not well-functioned, since the prices are rarely adjusted to match fluctuating demand. As a result, you get queues in front of restaurants.
This leads to dynamic pricing as a solution. In the nutshell, it is like any other pricing you might have encountered. The key difference is the frequency at which the prices are adjusted. For most restaurants today, the frequency would be measured in years, whereas dynamic pricing would ensure that prices to be adjusted every — say — 10 minutes. So, when there is a high demand for tables at predictable times, prices on the menu would increase, and less people are willing to attend that restaurant, and as a consequence, a queue would shrink in size. Waiting time is reduced.
So why we shouldn’t be expecting it in restaurants anytime soon.
I don’t think there is any technological obstacle for dynamic pricing. The main obstacle is mostly human. Here are a few that I can think of.
- Domain dependence: A term coined by Nasim Taleb, it describes our natural inability to consistently apply the same idea across different-but-similar-in-nature areas of experiences. In our case, we all have experienced dynamic pricing before, if you trade in a stock market or buy a ticket for a footy game or book a plane ticket. This leads to the second reason.
- Time interval: In all three examples, the durations at which the prices remain static vary. In a stock market during normal period of trading, this time can be measured in microseconds, and hence this market is often described as liquid. Whereas for a plane ticket, the price is fixed for each day. For dynamic pricing to work for a restaurant, this duration is required to be short enough to react to a sudden increase in demand during lunch and dinner. That means this duration should not be longer than 10 minutes. So, it is reasonable to assume that people would have problem with the price of their meals fluctuating every 10 minutes.
- Certainty: People want predictability. We all hate uncertainty. Despite its usefulness in establishing a fair price, people generally dislike unknown. We want to know how much our meal is going to roughly cost us before going into a restaurant.
- Something I cannot think of. Maybe listen to this episode of Planet Money might help.
In any case, it would be an interesting idea to implement in a restaurant. I believe that once it is normalised in restaurants, people will be more receptive to the idea, just like carparking in central San Francisco.