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Forward markets in everything, restaurant edition
Jason Kottke relates:
The Riverdale Garden Restaurant in the Bronx is trying out a novel way of staying in business: they're asking for their regulars to pledge $5000 in exchange for a year of free dinners.
The problem of course is obvious. First, you probably won't get your money back. Second, if everyone paid up, the restaurant has a weaker incentive to serve good food. And which customers do you think will receive the best treatment? The ones who put up nothing per each meal?
Posted by Tyler Cowen on February 28, 2008 at 02:18 PM in Food and Drink | Permalink
Comments
I suppose it makes a difference whether they intend to either stay in business or need a second beg-a-thon.
Posted by: anomdebus at Feb 28, 2008 2:31:23 PM
We have a share in a farm at our local Farmer's market. We get the same quality food as everyone else (actually better as they hold certain items for share members) and also we get updates about what is going on at the farm etc. If they handle their "bulk" customers properly, they could keep them as "bulk" customers for years to come.
Theaters have been depending on subscribers for years. Subscribers get advantages to encourage them to re-subscribe. Theaters get a bump in cash-flow (and guaranteed income) each year.
Posted by: Matt at Feb 28, 2008 2:38:44 PM
A better plan: they should sell one-year memberships, individually negotiated, and then sell their food at marginal cost. The membership price should approach consumer surplus, depending on how hard they negotiate.
Posted by: Byrne at Feb 28, 2008 2:55:59 PM
The big issue are the wait staff. If you tip well, they will be happy, and they know are coming back, so future good tips are in the offing. They will have an incentive to be even better to you as you are a returning customer.
Posted by: Brad Holden at Feb 28, 2008 2:56:49 PM
I think that shares in Farmer's markets are different than this. To me, a Farmer's market that relies on same day purchases has a strong incentive to produce more impulse goods. They will sell more tomatoes, basil, and corn. They will sell fewer squash, sprouts and root vegetables. Of course, buying shares doesn't compel them to produce these less popular items, but it lowers the relative incentive to do so.
But I agree with the basic claims about restaurant service and prepayment in the summary.
Posted by: Adam Hyland at Feb 28, 2008 3:02:59 PM
Is tip included, or are you expected to fork over $750 (15% tip) at some point? And is the $5,000 per person or for a couple or what? And who deignates who is a "regular" and who isn't?
Posted by: bronxilla at Feb 28, 2008 3:27:11 PM
We already have a way to spread risk and reward in companies we believe in, joint-stock companies.
Why not just sell equity shares in the company, and make food discounted for shareholders.
Posted by: OneEyedMan at Feb 28, 2008 4:04:11 PM
This relates to something I've wondered about before - maybe somebody has already thought about it.
Why do we pay for some services up front, but for other services after the event?
Services that are paid for up front include: movies, theatres, art galleries, music - live and recorded, strippers, trains, planes and buses, meals at fast food restaurants
Services that are paid for after the event include: haircuts, taxi rides, meals at non-fast food restaurants, most professional or consultancy services
What's the difference?
I find it easier to think of examples where the service is paid for up front, so maybe the question is: what's special about those we pay for after the event? Perhaps it's signalling confidence in the quality of the service? Although there must be more to it than that, otherwise the very best sports stars and musicians would only ask customers to pay after the event.
Posted by: Robert Scarth at Feb 28, 2008 4:15:17 PM
It is about bargaining power. Wages are paid after, rents are paid upfront.
Posted by: Student at Feb 28, 2008 4:36:11 PM
Advance payment is requested for services rendered to a large group of people simultaneously. Services rendered to individuals may be paid for later. Consider enforcement costs ... for individually rendered services, reputation suffices. If I don't pay my barber, I can never come back. But at the theater, if a critical mass of us decide not to pay, there's a good chance we can do so with impunity. (In any event, barricading the exits against riot would violate most fire codes.)
Posted by: Cyrus at Feb 28, 2008 5:42:40 PM
Reputation and repeat sales might prevent the restaurant from giving the subscribed customers shabby service.
Posted by: Mark N. at Feb 28, 2008 7:09:22 PM
Farmers market subscriptions are often on a monthly basis. This restaurant should NOT give free or discounted food -- sell shares and then distribute profits to owner -- if they eat or not. (Some people call this a cooperative.) Owners will POLICE the place for good food and service because they only get their money as ex post dividends. (Assuming no accounting gimmicks here...)
As part of this idea (or the OP), "memberships" should be tradable -- I'd hate to eat at the same place 365 meals in a row "to get my money's worth"
Posted by: David Zetland at Feb 28, 2008 7:14:56 PM
You pay in advance services which have a fixed price, while you pay after the service when the price depends on your use.
Posted by: Geego at Feb 28, 2008 7:35:09 PM
Why do we pay for some services up front, but for other services after the event?
The upscale escort agency in Mayflower Madam broke with near-universal custom in its, uh, industry by allowing tricks - oops, clients - to pay after the rendition of, er, services rather than upfront.
Posted by: Peter at Feb 28, 2008 7:43:06 PM
Hello Peter,
That may be because the Mayflower Madam had a different kind of reputational incentive for its equally upscale (read: prominent) clientele....
Cheers,
Jeff Deutsch
Posted by: Jeffrey Deutsch at Feb 28, 2008 9:34:25 PM
On the eve of a recession that's expected to be deeper than usual? No thanks. Not every business will make it.
Posted by: at Feb 28, 2008 10:58:06 PM
This looks like an unregistered and nonexempt public offering of securities to me.
Posted by: Thomas at Feb 28, 2008 11:22:28 PM
They should have charged a fixed fee in exchange for unlimited meals at cost
Posted by: at Feb 29, 2008 10:04:17 AM
Has anyone noticed that people on prepaid plans don't get quite the service that people who can choose to walk out without loss get? Sorry - I wouldn't bother with that restaurant. I likes me options, I duz. Or why I loathe cell phone contracts.
Posted by: Pat Mathews at Feb 29, 2008 10:05:39 AM
Hello Thomas,
If the restaurant's offer is "an unregistered and nonexempt public offering of securities," then so is every flat rate gym membership, every long-distance telephone plan with a minimum monthly usage and/or charge and every college dining hall's (non-a la carte)meal plan.
To whoever posted just before Thomas: excellent point. In fact, I'm sure people's expectations of the specific restaurant's future were altered by the offer itself. It may be a collective action issue: if the restaurant not only has a regular clientele but a tight regular clientele - that is, they know each other as such, especially if they meet for dinner there - they could counteroffer in matching-fund terms (if fewer than X number of others subscribe, give us our money back) or they could pass around a subscription sheet and sign up as a group.
To whoever posted at 10:04 this morning: great idea, now go bell the (asymmetric information) cat.
Pat Mathews, interesting point. Myself, I like to pay the flat fee and gorge myself (on food, cell usage, whatever), and I suspect many people feel the same way. We don't want to be bothered worrying about how much each individual meal or call will cost us - even if it turns out that our usage under an a la carte plan gives us at least as much utility (from goods consumed, not necessarily net of anxiety) at lesser cost.
Also, maybe a fine-dining restaurant could give better results than, say, a large phone company, because the customers may know the management/owners. Tyler, you're the foodie - what do you think?
Cheers,
Jeff Deutsch
Posted by: Jeffrey Deutsch at Feb 29, 2008 11:21:52 AM
This reminds me of the compulsory participation in the meal plan for all full-time students at the Liberal Arts college I attended. It was a voluntary exchange, I had to buy the meal plan (yes, even after moving out of the dorms) in order to get the education, so I can't say it was unjust per se, though I did gripe about it.
Not that this is exactly the same, since the restaurant isn't bundling the meals with anything else, but the food was awful.
Posted by: d.cous. at Feb 29, 2008 11:33:02 AM
To the poster named at: On the eve of a recession that's expected to be deeper than usual? No thanks. Not every business will make it.
Yes, that's why I won't buy a GM car, and why the warranty means little to me. You'll cover the drivetrain for 10 years? Great, and three years in, when I need the mechanic to work for me, he'll tell me to buzz off because GM won't pay him, because they have a bunch of old ladies that need their pension payments, and I'll have to get in line.
Yuck.
Posted by: Person at Feb 29, 2008 1:53:32 PM
Jeff, I'd note a couple of differences from the other offerings you describe. First, the possibility of profit sharing. Second, typically when you sign up for a gym membership it isn't conditioned on 49 others doing the same. That fits the test set out in the seminal Howey case: 1. investment of money due to an expectation of profits arising from 2. a common enterprise 3. which depends solely on the efforts of a promoter or third party.
Posted by: Thomas at Feb 29, 2008 9:06:57 PM
Hello Thomas,
Yes, I hadn't noticed the profit sharing part. I stand corrected. Thank you for bringing that to my attention.
Jeff Deutsch
Posted by: Jeffrey Deutsch at Mar 1, 2008 3:47:37 PM
Re: Adam Hyland's comment.
I think your prose is a bit confused here; I don't quite get both halves of the contrast. Anyway...
At Farmer's Markets in most of the country, farmers have limited (some, but limited) ability to produce more corn, tomatoes, basil, etc. at the expense of squash, beets, etc. They can bring the former to market when it's in season (mid-to-late summer) and the latter when it's in season (fall into early winter, though winter with proper storage.) A farm that gave up all its acreage to sweet corn would be left with nothing fresh to sell in October.
More on CSAs versus buying a la carte at a farmer's market:
* The cost of a CSA membership, pound for pound, is much less than buying the same items a la carte. In effect, CSA members trade off flexibility and choice (both from a per-week and whole season POV) in exchange for a better price. It works for the farmer 'cause it lowers otherwise substantial transactional and marketing costs, up-front guarantees aside.
- The only comparable benefit a community-supported restaurant would get is up-front guarantees.
* Your CSA share comes week after week whether you want it or not. The farm doesn't rely on you taking less-than-full-advantage (like, say a gym does), nor is it in a position where you could show up so frequently that you lose the business money (again, like you can do to your gym.)
* CSA membership fees provide for capital expenditures on the farm up-front. Seed capital, literally. Costs for the year are similarly front-loaded (and even those that aren't are usually no more than 6 months out and have foreseeable impact and cost.)
There are enough differences that this isn't really an applicable model. Something that might work a little better would be something like my wife's pre-natal yoga classes, where she paid upfront for a 10-session course. Similarly, a restaurant could offer a daily prix fixe and presell it in packs to regular customers. This way, the diner trades away flexibility for a (probably slightly better) price, and the restaurant gets up-front predictability and slightly lower transaction costs. It could work.
Without the prix fixe, though, no two diner-meals would ever be remotely uniform. If my prepay plan gives me the run of the menu, there'd be nothing to prevent me from ordering the lobster every time.
Or, now that I think about it, a hybrid plan could work. I'd get the run of the menu but have to pay out-of-pocket above a certain amount on my check. Interesting distortions could abound, but it's not a total non-starter.
Posted by: Matt H at Mar 2, 2008 12:43:51 AM
I can think of two industries that currently use a similar model. Ski areas and golf courses. In both cases you have the choice to make one lump sum payment for a years worth of utilization or pay a daily rate. In both cases I find that members receive preferential treatment. Throw in tipping and I would expect that a membership in a restaurant would have no negative impact on service
Posted by: STP at Mar 3, 2008 3:24:40 PM
