David R. Henderson  

Burger King Has It Its Way

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Who's Afraid of Virginia Woolf... Bullseye!...

Clemson University economist, and expert on the FCC and net neutrality, Thomas W. Hazlett, wrote the following on Facebook yesterday (he gave me permission to quote) about Burger King's now-famous (infamous) exposition of net neutrality:

Is this The Onion? A Burger King video attempts to explain Net Neutrality regulation. A quick service Whopper costing $25.99 is delivered fast, while a meal you wait for costs $4.99. Oops! Perfectly wrong. Burger King is under no "common carrier" mandate, and is perfectly free to price that way. It would be stupid, and customers would be offended (as in the video, that's the point of the script). So it doesn't happen. No regulation needed. Burger King misunderstands their own explainer video.

By the way, Burger King does discriminate among customers. For an extra fee, BK Delivers will take your order to your home. Call it a "fast lane" for the Whopper. Of course, promotional discounts do not apply. And the service varies by area. Don't be offended: not all differential pricing is stupid or anti-consumer. But Burger King should be. On its script, it's violating cheeseburger neutrality.

I'll add two other points:
1. Notice in the video that Burger King employees purposely slow down service to people even though the burger is ready. So Burger King's video makes it look as if the slowness has nothing to do with a capacity constraint. That's not what's happening on the Internet. The reason for low speeds is a capacity constraint.
2. If Burger King really wanted to use its own restaurant as a way to illustrate net neutrality, it would show the employees selling two hamburgers to one customer at the same price as it sells one hamburger to another customer. But then, of course, everyone would see the absurdity in this pricing scheme. Burger King doesn't want them to see. An alternative explanation is that whoever at Burger King wrote the script for its together doesn't understand the issue. Which explanation do you prefer? Have it your way.


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COMMENTS (18 to date)
CMOT writes:

Burger King can't have a financial stake in this issue one way or another. Of course it's just virtue signalling, but it proves that Net Neutrality is the new Socialism of fools.

Hazel Meade writes:

I was unaware of the original video (the blessing of having cut the cord). But the idea of the whopper being the same for everyone strike me as kind of subversively anti-net-neutrality. Isn't Burger King famous for allowing customers to customize their own whoppers? I vaguely recall that being something BK advertised back in the 80s - that they were one of the first fast food joints to let people request to hold the ketchup or other ingredients.

And now you made me want to eat a hamburger.

G writes:
That's not what's happening on the Internet. The reason for low speeds is a capacity constraint.
That's not necessarily true, on mobile networks (or you can set it up on your home network) you have rate limiting measures where you limit the access to certain content to a certain speed. For example, even if you have a 20 Mb/s capacity you can limit access to youtube to 10 Mb/s.

Translated to burgers: if you order three burgers you would get the first one after 2 minutes, the second one after 7 minutes and the last one after 12 minutes. When you could get all of them within 3 minutes...

The other aspect that is not explored at all is blocking. A few years ago, one of the ISP blocked access to Google Wallet to favor their own payment solution.

Tom DeMeo writes:

ISP's have an oligopoly granted by public accommodation.

ISP's are under no obligation to inform customers what they are charging to other customers.

Without net-neutrality, slowness does not have to be related to capacity restraint, and we would have no way of knowing why we were experiencing slowness.

Not all differential pricing is stupid or anti-consumer. But some of it is, and it is particularly worrisome when there are oligopolies involved. The public holds the power here. We don't have to give that power away.

Jon Murphy writes:

@Tom DeMeo

But some of it is, and it is particularly worrisome when there are oligopolies involved.

So how does it solve the problem by making those oligopolies even more powerful?

ISP's [sic] are under no obligation to inform customers what they are charging to other customers.

Perhaps, but then that'd ruin the whole point of price discrimination. If customers don't know what the various options are, then one cannot successfully price discriminate, can one? For example, if movie theatres didn't tell people they have lower prices for matinees than they do for evening shows, how would they be able to lure people to matinees? How'd they be able to tap into that area of consumer demand they're trying to tap into? Likewise, if ISPs wanted to successfully price discriminate, how'd they be able to do so if they don't tell people what they charge?

Jon Murphy writes:

Another point I'd like to add is that: given there is no cheeseburger neutrality, why doesn't Burker King operate the way they do in the video? The answer is obvious (to me anyway): if Burger King acted in this manner, MacDonalds, Wendys, and their other competitors would literally and figuratively eat their lunch. Customers would flee Burker King and go to their competitors, forcing BK to either adjust their model or abandon it completely. As Mark Perry likes to say: competition breeds competence.

To the extent that people cannot simply switch ISPs, it is due to some local or state regulation preventing them from doing such, in which case the solution is to address those regulations rather than neuter competition further with Net Neutrality.

MikeP writes:

To the extent that people cannot simply switch ISPs, it is due to some local or state regulation preventing them from doing such, in which case the solution is to address those regulations rather than neuter competition further with Net Neutrality.

Indeed. And those local franchises and regulations are becoming less and less important as alternative forms of access are developed and become competitive at the margins as well as in the aggregate. Besides, the blunt truth is that monopolies cannot charge more than the value they provide. Even monopolies maximize their profits by maximizing the total service they provide, especially with competitive pressure at the margins where their users may flee to lesser or better forms of access, depending on what those users want.

Net neutrality makes such competitive pressures illegal.

I know Netflix wants everyone to think that Netflix is the apotheosis of the internet. But I don't believe it is. By making whole swaths of as yet unconceived business models illegal, net neutrality is the enemy of innovation.

Tom DeMeo writes:

@Jon Murphy

"But some of it is, and it is particularly worrisome when there are oligopolies involved.

So how does it solve the problem by making those oligopolies even more powerful?"

I don't understand your point here. Are you claiming that net neutrality makes ISP's more powerful?

As to price discrimination, it doesn't require that a customer knows what other customers pay. It only requires that the company can establish more than one value proposition with the customer, and communicates price tiers to that individual customer.

"To the extent that people cannot simply switch ISPs, it is due to some local or state regulation preventing them from doing such, in which case the solution is to address those regulations rather than neuter competition further with Net Neutrality."

At least right now, broadband internet is delivered over wires or wireless spectrum. This limits the market to a very few providers, and often just one. Removing regulations won't open up competition. That's the only reason this matters. If the market could be opened up to multiple providers, competition would take care of it.

James writes:

@Tom DeMeo,

You write "This limits the market to a very few providers, and often just one."

Do you have any estimate of how many households in the US only have one ISP available to them? I live in a pretty rural place and I have at least three wired ISPs to choose from, plus a few different wireless providers.

Kevin Dick writes:

@David. This video came up in by Facebook feed and bothered me too. I came up with the same idea of all meals costing the same:

"Wait! That guy just got 5x the food for the same price." "I'm sorry, sir, but the Burger Control Commission has instituted a Meal Neutrality regulation that we must charge one price for all meals."

I also noted that Burger King would _never_ do this in reality because McDonald's and Wendy's would be happy to take their dissatisfied customers.

Jon Murphy writes:

@Tom DeMeo

I don't understand your point here. Are you claiming that net neutrality makes ISP's more powerful?

Yes, by preventing competition.

As to price discrimination, it doesn't require that a customer knows what other customers pay. It only requires that the company can establish more than one value proposition with the customer, and communicates price tiers to that individual customer.

Which means it is also broadcasting what other customers with similar desires pay (unless we assume the firm somehow makes extremely customized packages for each and every person, but I'd think search costs alone would make that prohibitively expensive but imagine what a wonderful world that'd be if it could happen!)

Pierre Lemieux writes:

Very good post, David, and extremely relevant to the net neutrality debate -- as well as to the politicization of corporations.

David R Henderson writes:

@Pierre Lemieux,
Thanks, Pierre. That means a lot coming from you.

James Pass writes:

All analogies have faults. However imperfectly, Burger King is expressing a concern that many people have. Let's keep in mind that a significant number of industry experts are expressing concerns about the FCC ruling. Most of those concerns relate to the potential for monopolistic practices that, overall, might end up harming consumers.

For example, people are concerned that they will get slow speeds not because of capacity constraints, but because ISP's or media companies will purposely slow down service.

Mr. Henderson wrote: If Burger King really wanted to use its own restaurant as a way to illustrate net neutrality, it would show the employees selling two hamburgers to one customer at the same price as it sells one hamburger to another customer.

Consumers pay more for faster speeds and higher data limits, just like they pay more for two burgers than for one burger. Consumers don't object to this.

One difference between Burger King, ISP's and media companies is that if you don't like Burger King, it is ridiculously easy to take your business elsewhere. There is a staggering amount of competition and choices in the fast food industry. The same can't be said for ISP's and media companies. I've known people who, even though they despise certain ISP's and media companies, still go back to them because that's the only way they can get what they want. Of course, people have had problems with ISP's and media companies even with net neutrality, but the concern is that it might get even worse without net neutrality.

There is some history to support these concerns. For example, there have been instances where service providers blocked sites that competed with their own services. Some argue that the market and consumer reaction will effectively discourage and correct such actions. Others argue that if a company blocked competitors, the government might respond with antitrust laws rather than net neutrality regulations. We'll see.

Of course, for years many Americans have complained that they pay too much and get too little from their ISP's and media companies, and they bemoan the lack of real choices and real competition.

I'm curious about the dog Burger King has in this fight. I assume they're concerned that they've got something to lose from the FCC decision. There are a number of big companies that oppose the ruling.

Thomas Hazlett writes:

Thanks to David for posting this! On the point that the ISP market is structurally distinct from the burger market -- it was Burger King's proffered analogy. No doubt it's a poor metaphor in multiple dimensions. And the relevance of oligopoly can be gauged by jumping straight to an examination telecommunications monopoly. The common carrier regulatory structure was advanced by the famous AT&T monopoly, and adopted in the 1934 Communications Act (a textbook example of capture). The regime then proved so reliably hostile to consumers and competition that the US DOJ Antitrust Division filed suit against Ma Bell. It won, of course, leading to a 1984 divestiture. it is this regime that Net Neutrality, in its 2015 incarnation at the FCC, was nested within. I discuss this in a recent commentary in the NY Daily News: http://www.nydailynews.com/opinion/net-neutrality-farce-article-1.3649219. As for government enforcing barriers to entry in the current broadband ISP market, Net Neutrality does nothing to reduce them and has been highly correlated (in terms of Title II rules), in fact, with lessened ISP rivalry. (See Hazlett & Caliskan, Natural Experiments in Broadband Regulation, Review of Network Economics (2008).)

Mark Bahner writes:
2. If Burger King really wanted to use its own restaurant as a way to illustrate net neutrality, it would show the employees selling two hamburgers to one customer at the same price as it sells one hamburger to another customer.

Burger King is currently selling two cheeseburgers to all customers at virtually the same price as it sells one cheeseburger. (Actually, possibly even a little less for the two cheeseburgers than the one cheeseburger.)

I get the King savings meal that's two cheeseburgers, a small fries, and a small drink for $3.75.

I think they're still offering their Value Meal, which is one cheeseburger, a value-size fries (which is even smaller than "small") and a value-size drink (which is also smaller than a "small" drink) for $3.43.

In other words, for 32 cents more, a customer is getting two cheeseburgers instead of one, a slightly larger fries, and a slightly larger drink.

I can't pretend to understand it. I get it even though I definitely don't need the calories, just because I can't stand the thought of passing up such a good deal.

Thaomas writes:

The problem with non-Net Neutrality is its potential interaction with carriers also being content suppliers.

Let's go back to the Burger King example. There might be something to be said for allowing a monopolistic burger delivery firm to price-discriminate among burger-makers but less so if the delivery firm were also in the burger-making business.

MikeP writes:

Thaomas gets right to the heart of the inanity of the Burger King net neutrality video.

Under burger neutrality it would not only be illegal to have differential pricing for various levels of Whopper service versus the chicken sandwich service, the apparent point of the video. It would also be illegal to block access to Big Mac service or to charge differently for the Big Mac service because it was provided by McDonald's.

Is this the message that Burger King really wants to send? That they should be forced to sell Big Macs under burger neutrality?

Now I happen to think that economic theory and reality tell us that, if McDonald's happened to build a pipeline of Big Macs to the back of Burger King, it would be profitable for Burger King to sell the Big Mac service at a reasonable price -- especially if people could select only one burger provider for all their burgers. Those people would be motivated to choose Burger King over McDonald's if Burger King provided McDonald's burgers, but McDonald's did not provide Burger King burgers.

As with most analogies net neutrality supporters come up with, the Burger King net neutrality video shows just how tissue thin the arguments for net neutrality really are.

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