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Why do successful restaurants not raise their prices?

Henk Folmer () and Auke Leen ()

Letters in Spatial and Resource Sciences, 2013, vol. 6, issue 2, 90 pages

Abstract: Becker (J Political Econ 99:1109–1116, 1991 ) addresses the problem of persistent queues at popular restaurants. He poses the question why such restaurants do not raise their prices, thus reducing the queues while expanding profits. He presents a solution based on the assumption that demand by a typical visitor to such a restaurant depends positively on the quantities demanded by others which could be so strong that the market demand curve slopes upward. For an equilibrium to emerge, Becker introduces a free lottery. We show that Becker’s lottery is based on assumptions which may hold in the case of spontaneously emerging queues, but not in situations like popular restaurants where consumers apply self-rationing. In both cases, however, every individual’s demand function, in addition to price, depends on effective demand rather than on aggregate demand. Using the forces underlying aggregated demand, we show that Becker’s solution leads to excess supply rather than excess demand. We use the all-or-nothing demand curve and the notion of patient consumer to show that a popular restaurant (and other firms facing persistent queues) sets a price such that equilibrium is achieved while long run demand is upheld. Copyright Springer-Verlag 2013

Keywords: Persistent excess demand; Bandwagon effect; Queue; Waiting list; Long run demand curve; Short run demand curve; Becker; All-or-nothing demand curve; Patient consumer (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s12076-012-0088-x

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