James Schneider  

What the Market Says about Your Neighbor's Restaurant Choices

Why we debate the unimportant ... Open Borders Day Roundup...

Should your neighbor make healthier choices at restaurants? Market signals are one source of information. Left to their own devices, restaurants rarely provide calorie information at the point of order. Evidently, people do not want to be reminded about the fattening nature of hamburgers right before they order one. You might think that restaurants just don't want to badmouth their product; hamburgers and other fattening foods are the stock and trade of many restaurants. But this fact is also the market telling us something. Restaurants aren't intrinsically good places to eat hamburgers and bad places to eat salads. A tasty salad has a lot of ingredients which have a short shelf life -- this is the type of meal you might want to outsource to a restaurant. The fact that people eat so many hamburgers at restaurants is a signal that many people prefer eating hamburgers to salads. However, what if these people actually do want to eat salads, but they are irresistibly tempted by hamburgers when they get to the restaurant. Maybe people desire commitment devices to eat better. Does the market have anything to say about this?

The market is often better at abetting good habits than it is at discouraging bad habits. Imagine an alternate world in which a lot of people aspired to smoke more cigarettes but they had trouble sticking to their preferred regimen. In this alternate world, the market might offer yearly memberships that shipped people a carton of cigarettes every week. Or, pharmacies might sell a membership pass, where you get a free or discounted pack of cigarettes every day. These arrangements would incur a fixed cost, but they would lower the incremental cost of smoking additional cigarettes -- thus helping you to achieve your goal of smoking more. However, it would be harder for the market to inflate the future cost of cigarettes in the more likely event that you needed help reducing your smoking. Imagine explaining to the local Quickie Mart that higher cigarette prices would further your health goals. What would happen if Quickie Mart obliged your strange request and promised to inflate the price of cigarettes that they sold specifically to you? When cravings struck, you would just buy your cigarettes at a different store.

A common way to foster good future behavior is subscribing to a yearly gym membership. With a yearly membership, the additional cost of going to the gym one more time is $0. This is a significant subsidy because each additional visit increases the cost of running the gym by $3 to $6. The market happily offers this particular commitment device because people frequently overestimate their future desire to go to the gym. The frequency of failed diets suggests that people also overestimate their future desire to eat better. Yet restaurants still don't seem interested in offering people commitment devices to eat better.

The technology for such commitment devices already exists. Restaurants offer ways to lower the future cost of eating restaurant meals; they just don't find it profitable to market these programs as ways to encourage healthy eating. Restaurant gift cards have similarities to membership schemes, but they are not geared to encourage healthy eating. A restaurant like Applebee's could sell gift cards for their salad entrees. This would reduce the future cost of a salad to zero. (And you would probably have to use the card yourself, since it might send the wrong message as a gift.) Restaurants also have loyalty cards and programs that reduce the future cost of eating. Again restaurants do not design these programs to further healthy eating. T.G.I. Friday's offers a loyalty card that could hypothetically be used for a variety of healthy programs. Technology now allows more elaborate and finely tuned loyalty programs. Applebee's is upgrading their tabletop electronics system which will facilitate any type of loyalty program imaginable. Smartphone apps like Apple's Passport system also make any type of contract feasible. Starbucks, Dunkin' Donuts, and Pinkberry have pioneered these apps. Not surprisingly, these apps aren't being marketed as ways to help people make healthier restaurant choices. The market offers a lot of programs that could easily be tweaked to be commitment devices. The fact that the market doesn't offer these commitment devices indicates that they probably aren't desired.

Here is a good economic overview of commitment devices.

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CATEGORIES: Economic Methods

COMMENTS (6 to date)
Hazel Meade writes:

I don't know how LA Fitness works, but at my local gym the "break even" threshold is set so high that it makes it not worthwhile to get a membership, and hence makes me less likely to commit to exercising.

I would have to use the gym at least 10 times a month to break even, which is 2-3 times a week. But I barely have time to get in there once a week, given that I have other things I want to do on the weekend, and communting and food needs make it difficult to go during the week.

They're going to have to offer me a steeper discount if they want me to buy a membership.

JKB writes:

People want to eat healthy in theory, but not in fact. It doesn't help that "healthy" is a debased term use by charlatans from the USDA, to advocacy groups, to marketers. A salad is healthy in theory but by the time the diner has added taste to it, usually not so low-cal although perhaps still "healthy".

Not to mention, much of what is 'healthy" is not based on good science and is being overturned. Just this last week, the NYT reported on a study that found saturated fats, long maligned, are not linked to heart disease. As an aside, the researchers found that the smaller lipids formed by excessive carbohydrates were linked to fat build up in the arteries. So really, that unhealthy hamburger can be turned around if you ditch the bun, avoid the fries and sugary drink. The latter two items being big profit centers.

So how to market a commitment device in that changing landscape? Not to mention, their are "healthy" restaurants that avoid even offering "bad" alternatives. No doubt their fare would find its way into the menus of the more popular restaurants if such "healthy" alternatives were finding a decent market.

Thomas Boyle writes:

I don't know about your conclusion. There are diet meal services, where you pre-purchase a week's worth of meals, shipped to your home. You are now pre-committed to eating those meals (otherwise your freezer will start to fill up). You won't more than you should at a sitting, because it would require eating a whole additional meal. The plans auto-renew, so although it's a "soft" pre-commitment, you have to take conscious action to stop it.

At restaurants you have a different issue: bimodality (this also happens with fitness clubs, but it's probably less severe there). A "salad plan" at McDonalds wouldn't do me much good if I eat at McDonalds only once every few months - so how would McDonalds offer me a salad plan at a price that would be attractive to me, but still cover the cost of people who live nearby and will eat salad twice a day?

James Schneider writes:

@ Thomas

Here is an example. If you buy a gift card at Olive Garden then you can use it Red Lobster and a bunch of other chains owned by Darden restaurants. Bloomin' Brands has a similar arrangement within its restaurants. All Darden Restaurants would have do is restrict use of the card to salads, healthy fish meals etc, sell the cards with high dollar amounts and offer a volume discount. All of these are normal business practices except restricting the card to healthy choices. This isn't like stickk.com where you have to convince people that a contract with no upside makes sense. This is something that is very similar to what people are already doing.

I'm not suggesting that the market could implement the perfect outcome. I'm saying that ordinary business practices could easily be tweaked to offer value to people looking for commitment devices. The fact that no one has done this suggests that there isn't much of a demand for the product.

Ian Brown writes:

Thanks for the business idea! I'll let you know how it goes.

Raymond Tseng writes:

What about hyperbolic discounting?

If people have different discount rates for short term (taste) and long term decisions (health); the commitment device won't be enough. Is the commitment device a sunk cost given hyperbolic discounting?

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