Emily Skarbek  

Some Economics of Tipping and Take Away

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Munger and Roberts have a great Econtalk where they briefly discuss restaurant pricing schemes and the puzzle of why it is not usually cheaper to have take-away (a.k.a. "to go") when clearly the cost of producing the good is cheaper than if one doesn't eat-in. Having lived in London for nearly four years, I thought I might provide some relevant observations from this side of the pond. Here, many restaurants do charge lower prices for take-away than for the same item eaten inside the restaurant. Here is one example from my local Starbucks:

IMG_8074 Small.jpg

One hypothesis is that this is more common than in the US because of the high real estate prices in London. Due to just how expensive land is here, the price of taking up space is better accounted for by restaurants. I think this helps explain the pervasive practice of setting time limits on tables in restaurants in London, but not the price differential between eat-in and take-away. This pricing strategy is at work in other areas of England where real estate prices are much lower. And we also don't seem to see the price differential emerge in high priced real estate US cities like San Francisco. So, that doesn't seem a good answer.

Perhaps the answer lies in the divergent tipping norms in these two countries. In England, for many restaurants, it is not expected that guests tip at all. If the meals for take-away and eat-in were the same price, this would be an example of divergence of price from marginal cost. Thus, restaurants price take-away lower than eat-in because it is cheaper to produce. In the US, by contrast, tipping norms mean that you are paying less for take-away rather than eat-in. This is consistent with the idea that the tipping norms affect "official" prices because if tipping doesn't exist, then the restaurant owner must explicitly and intentionally discount the prices.

A corollary prediction, supported by my casual observations, is that in those London restaurants that do include a "recommended service charge" for eat-in service (which is usually 12.5%), these are the restaurants that do not have price differentials on take-away and eat-in.

Finally, my brilliant husband likes to point out the absurdity of the oft-made claim (see here, here, and here for example) that tipping should be done away with because most people give the same tip regardless of the quality of the service. We're both service industry veterans, but also economists, so can attest to the fact that what matters is not the average responsiveness of tippers, but the marginal ones. The average response is irrelevant. The marginal consumers who do adjust their tips based on quality can and do send a clear message to reward quality and punish poor service.

Addendum: my colleague John Meadowcroft points out that the VAT in the UK is 20% on eat-in and lower on take-away. The rules differ based on whether the food is hot or cold. Cold items can take advantage of the lower VAT, and thus the lower take away price, but hot items are subject to the higher VAT. A twitter exchange with a popular chain in the UK confirms this practice within their branches (and they report that cold food is actually "zero rated" for VAT).

This is anecdotally confirmed with closer inspection of my local Starbucks. The "luxury fruit bread" is served warm and toasted. The cinnamon swirl is not. And the eat-in price of the cinnamon swirl is exactly 20% higher than the take-away price.

IMG_8073 lux toast.jpg

It's compelling that the price difference in the UK is mostly the result of the VAT. As such, a great example of how taxes increase the cost of production and prices reflect the those marginal costs. But doesn't help to explain why you don't see different eat-in take away prices in more US restaurants.

Comments and Sharing

COMMENTS (12 to date)
Phil writes:

Is part of the difference that sales tax is applicable to eat-in, but not take away?

John S writes:

Is it really absurd to claim that tipping should be done away with? In Japan and Korea, service is impeccable without tipping. I'm sure other similar examples exist.

That's not a slam dunk argument against tipping, but the pro-tipping case isn't as airtight as you think.

(And yes, I get the point on marginal vs. avg tips).

Gabriel Puliatti writes:

Having lived in the UK, I thought the same as Phil. In the UK, no VAT is charged on cold takeaway food.

Hot takeaway food, and any items eaten inside the premises are charged with VAT.

A few years ago there was a massive scandal over what was called the "Pasty tax", where Osborne was trying to close a loophole where some items which were baked for sale, and sold hot (like pasties and bread) weren't charged VAT. Wikipedia has a bit more on this.

The Original CC writes:

Good post.

I remember thinking that discussion between Russ & MM was odd for the following reason: In my experience, it's a *lot* cheaper to do take-out than dine-in, just like theory would predict.

With take-out, you save 15% on tips and several dollars on drinks. Add this to the fact that a lot of places have take-out specials and you have a significant take-out discount.

OTOH, I can also see how some restaurants might want more people to eat in the restaurant in order to make the place look more popular. So they might even offer an eat-in discount. (I think I may have seen this once.)

Michael Savage writes:

The clincher is that there was no differential pricing until they introduced sales tax for eat-in a few years ago. A couple of fast food chains ate the extra tax, and continued to charge same prices. Most places added a supplement (not exactly equal to the tax) for eating in. Until then, it was uniform price.

John Thacker writes:
But doesn't help to explain why you don't see different eat-in take away prices in more US restaurants.

While a number of US states do charge different sales tax for eat-in versus prepare at home foods (and it can get quite complicated), the difference is quite small compared to the UK VAT difference of 20%, and in addition prices are marked pre tax so you wouldn't see a difference in the listed price.

A few other guesses:
1) Eat-in diners are more likely to purchase more, especially high margin drinks. (Whether alcoholic or not, it is always significantly cheaper to get beverages outside.) Related to the "why don't merchants pass along card charges?" argument.
2) If you charged a cheaper price for takeaway, people would just order food to go but then sit down anyway.

Ricardo writes:

There is path dependency here too. If I ask American economists why a 12oz coffee is not exactly half the cost of a 24oz coffee, they might respond that most of the cost of the coffee is in the barista's time, which is pretty much independent of the size of coffee.

But then how do you account for the fact that in Britain a half-pint of beer is (usually) exactly half the cost of a full pint? Consumer expectations seems to be the driving force here. So path dependency matters too.

Daublin writes:

Tipping has many problems, including the one that John S. points out.

A separate problem is that there's no way to tip precisely the people who made your service be better. Most obviously, there's no reasonable way to tip the chef. You also can't tip the front-door greeter, the bartender (if you're at a table), or the person who installed the HVAC system in a pleasing way.

A bigger problem is that tipping would obviously fail to scale if we did it for all that many services. You want to mail a package, and you tip the person at the cash register. Someone bags your groceries, and you tip them, too. A cashier gives you change for a ten, and you tell them to keep 50 cents for themselves. And on and on.

In fact, there are societies like the above. They're called "corrupt", and the "tips" are called "bribes". Now, maybe "bribery" is a worse-sounding word than it deserves to be; some amount of bribery seems to make the world go around.

In closing, is it really so strange to ask if we shouldn't have less bribery? Some societies seem to achieve it, even in restaurants. Why not the U.S., and what would go wrong if we did get to that point?

Would any economist like to weigh in on the expected payment for waitors if all Americans just stopped tipping at the same time? I would think both the food prices and the official pay would rise to compensate.

john hare writes:

Go to a restaurant where waiters share tips and compare the service to one where individuals keep them personally. There is a quite noticeable difference in my area. Then look at restaurants, mostly fast food, with no tipping and notice the employee turnover and required level of management attention. If I were to travel to a place with good service and no tipping, I would have a "when in Rome" attitude. Until then, I'll tip, and more than 15% in most cases.

John S writes:

Agree with Daublin's point on non-scalability.

John Hare raises another interesting issue--tipping has a free rider problem. Big tippers are being exploited by non-tippers and low tippers. Better to include the price of service in the bill and let the restaurant worry about the uniformity of service.

Amazon provides excellent service. Should we implement micro-tipping to reward the warehouse worker when my package arrives a day earlier than expected?

JdL writes:

I'm guessing the photos back up the point you're making, but in the resolution provided, they're illegible.

Erin writes:

I ordered pizza for delivery tonight and part of the $15.20 total (before tip) included a delivery fee. A guy delivered my pizza and I handed him a single $20 bill. He didn't offer me a receipt or change, he just started walking away with the bill. I called out to him saying that I wanted change. He came back and said, "You know we work for tips, right?"

I was stunned at his response and as he fished out change, I just said that I would take $2 of my change and he could keep what was left over. I decided not to write a review of my experience on the order even post about it on my personal social media but I couldn't figure out why that interaction bothered me. I think there were two reasons:

1) The fact that he felt entitled to keep the change when it was in excess of 20% of the order total. It gave me the impression that it wasn't my place to decide the tip for an order a paid with my own money.

2) The fact that he said something to me when I just asked for change. I probably would have let him keep more of the change if he had been more gracious. But because I felt like he tried to deprive me of the choice to tip or not to tip (and how much), I came away from the encounter with a bad taste in my mouth.

I don't know if pizza delivery drivers here in Virginia are paid sub-minimum wages like servers at sit-down restaurants but I have always tipped pizza delivery drivers. I do think the minimum wage exemption for restaurant workers should be abolished, I would be fine with paying a service fee instead. Maybe then we could get rid of tipping and such awkward encounters with pizza delivery drivers could become a thing of the past.

Obligatory disclaimer: I have never worked in an industry where tipping is customary or factored into compensation but I have worked in tech support so I know at least some of the pitfalls of service work.

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