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Anecdote Alert: Do restaurant deposits depress attendance? January 1, 2015

Posted by tomflesher in Examples.
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Last night I spent New Year’s Eve at one of my favorite restaurants, Verace in Islip, New York. I actually did New Year’s Eve there last year, too, and there were three very interesting changes. The upshot is that the restaurant, though it had a fantastic menu, was significantly less full than it was last year, and the crowd skewed slightly older.

First, the price of the dinner was $65 last year and $85 this year. That corresponds to about a 30% price hike. That might deter some people, but I’m skeptical. The price-elasticity of demand for restaurant meals is about 2.3, or very elastic. (That means that if the price of a restaurant meal changes by 1%, the quantity of restaurant meals sold would drop about 2.3%.) If that’s the correct elasticity to apply here, that would explain a 69% drop in attendance, but I’m not so sure that restaurant meals on New Year’s are as elastic as restaurant meals during the rest of the year. The well-known Valentine’s Day Effect causes price elasticity for certain goods (cut roses) to drop on Valentine’s Day, and since a meal at home isn’t a close substitute for a restaurant meal on a special occasion, I’m skeptical that this price change would explain the precipitous drop in attendance.

Second, the restaurant required a deposit this year – $50 per person, returned at the beginning of the meal as a gift card. This was my first hypothesis, but I’m not sure it’s much of an explanation. For one thing, I put down my deposit on Monday, so there was no real loss of value. $50 per person to hold a spot is well within the income for most demographics that you see at Verace most nights [more on this in a moment], especially since it operated as a credit on the bill. No dice here, really.

Third, this might be the big one – Verace is part of the Bohlsen Restaurant Group, which operates a couple of restaurants at slightly different price points. This year, BRG made a big deal of advertising different, keyed experiences at their different restaurants. Specifically, Teller’s was a much more expensive steakhouse offering, Verace was a meal only, but Monsoon – their lower-priced, Asian fusion restaurant – had a modular menu with options of $75 for a meal (a bit cheaper than Verace, but not much) and $75 for an open bar. The open bar and Monsoon’s dance floor almost surely made it more attractive to younger revelers. That also explains the shift in demographics – Verace’s younger crowd may have been cannibalized by another BRG restaurant.

In the alternative, our waiter’s hypothesis: The manager did a great job seating people. “This guy,” says he, “is a magician.” He may be, but I’m more interested in seeing Monsoon’s numbers.

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Comments»

1. Joe Genshlea - July 19, 2017

So I’m a restaurateur who holds a degree in Econ (1996). I’m trying to get my brain wrapped around the likely outcomes around price increases due to minimum wage changes. After figuring out the change in payroll I now know that I will need 6% more revenue to offset the increase in minimum wage.

However, If I increase price by 6% my gross revenue will likely not increase by 6% because dining is price elastic right (2.3 is the number you cited above)?. So using the elasticity above an increase in 6% will result in 13.8% fewer items being sold? Well this means my gross revenues may decrease if I’m not mistaken.

Where did you find that 2.3 elasticity number?

Thanks

tomflesher - November 2, 2017

Hi, Joe – sorry about the delay in replying! The number itself is likely a bit dated, and was grabbed from a textbook (Krugman and Wells 4th edition, table 6-1). The text didn’t properly credit a source, so take the specific number with a grain of salt; primary sources for the number appear to be an analysis on data that ended in the 1970s. However, even if the number itself isn’t precise, restaurant meals are probably elastically demanded because they tend to have a multitude of close substitutes with independently-determined prices.

Your intuition is correct – a 6% increase would result in about a 14% decrease, and in general when elastically-demanded goods increase in price you’ll see a drop in revenue.


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