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Luxury Food and Network Effects

People can be quite irrational when it comes to food.  No, this isn’t about the alarming trend of Americans stuffing their faces with pre-processed meats and trans-fat laden fried objects in a slow decline towards a national obesity epidemic; rather, this is about the interesting economic decisions that people make when it comes to luxury food.  In general terms, luxury food is a style of food characterized by higher quality ingredients and preparation techniques, which as a consequence is accompanied by higher prices.   More often than not, however, the prices of these so-called luxury foods far outstrip their actual preparation values.  In some cases, the quality of these foods might actually be lower than that of the food at nearby low-scale venues  (the author of the article above compares Burger King and a luxury restaurant called the Spotted Pig – when compared, the former offers more choice and less attitude).

The situation that food consumers then face is that of an economy without network effects.  In other words, reservation prices and market prices should be the primary driving factors behind consumers’ decisions.  One could argue that informational effects play a significant role in the luxury food industry, but it seems unlikely that an information cascade would form solely based around the attributes of food cost and quality.  After all, with information cascades being as fragile as they are, there should be no reason for luxury restaurants with abhorrent food and sky-high prices to exist after an initial group of patrons have discovered the cost.  Indeed, many of the world’s best fine-dining locations have been blasted by critics and commoners alike, dispelling any illusion that these restaurants are in any way better than their cheaper counterparts… or has it?

Somehow, despite the fact that many of these top restaurants are derided and scorned, people keep coming back.  An alternative to the information cascade theory is provided by the author of the article: Veblen goods, or goods that increase in consumer value as their prices go up.  In the framework of the reservation price – market price graph, Veblen goods represent the phenomenon wherein as p* is artificially inflated by producers, the y = r(x) reservation price curve rises up to meet it.  In other words, instead of producers setting a price that is under the reservation prices of a certain portion of a population, the population as a whole is raising their prices to meet the prices that the producers set.

Still, food cannot be considered a Veblen good: if CTB raised the price of a small coffee to $18, it would quickly find itself out of business.   So if the luxury food consumption phenomenon is not a result of informational effects, network effects, or Veblen good status, what is keeping people in this seeming non-equilibrium state?  The answer, according to the article, is as counterintuitive as it makes perfect sense.  Instead of making their own decisions or observing the decisions of others, luxury food consumers are dragged along by the prices and bad service standards set by fancy restaurants.  People are not actually paying for the food – they are paying for exclusivity, or the ability to believe that they are better than others because they could wait in long lines and pay $50 for a slice of beef.  And the more expensive it gets, the more we want it.

– dhau


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November 2012