How Much Money Does a Buffet Make?

I was talking with my friend the other day and we got into a discussion about buffets (yeah, like the restaurant). Supposedly, a local buffet had raised its prices to $15 per person. I remembered going to that same restaurant few years ago, when prices were only around $10 per person. I'm sure there has been inflation since then, but a 50% increase in prices is a bit drastic.

I thought about the issue a bit after I went home. There were many possibilities to the mysterious price increase: increases in the quality or quantity of food, improvements in the quality of service, or even renovation that improved the general atmosphere of the restaurant. All of these were (and still are) legitimate possibilities. I haven't been to the said restaurant in a few years, so I don't really know if these factors have changed. This, therefore, adds some significant confounding variables to this analysis, which makes my idea somewhat akin to pure speculation (aka don't use it for your next research paper).

Still, the idea makes sense both from a logical and economic standpoint.

My idea is that buffets suffer from the problem of adverse selection. The concept is not that difficult to grasp. Taking into account the fact that buffets charge by person and not by item (the very definition of a buffet) and the fact that people have varying food consumption capacities, the problem immediately becomes clear. Assume that the current price for a given buffet is $6. If I can eat $10 worth of food and my friend can only eat $3 worth of food, going to the buffet is then a very bad deal for my friend (a loss of $3). I, however, am getting a net benefit of $4 from going to the buffet. The logical solution is for my friend to stop going to buffets.

This presents a problem for the buffet restaurant. Because it sets its price based on the price it takes to feed the average customer, a decrease in the number of people who don't eat very much will shift this average higher. If the average customer eats more, then the firm must increase its price to keep profits. But if it increases prices, people who originally benefited from the lower price would drop out of the market! (If the price went from $6 to $7, people who benefited at  $6.50 would stop going to buffets).

This is probably why buffets charge different prices for children and adults, in an attempt to price discriminate. This is probably why buffets make overly greasy food and give you giant glasses of water that constantly get refilled. This is probably why McDonald's heats their coffee to super-high temperatures so that the customer never has a chance to refill. This is also probably why movie theaters only allow for refills with the largest sized popcorn. The bottom line is, the less you eat, the more these firms make.

But in the end, how much does a buffet make? The answer is as ambiguous as that of any two armed economist: It depends. If the firm is smart enough to take the price discriminatory and profit generating measures necessary, the answer is probably a decent sum. If it goes into the market with a complete blind eye to the issue of  adverse selection, the results might be more humbling (which might explain why two or three Chinese buffets have failed in our area in the past few years).

So the next time you're at a buffet stuffing yourself full and wondering why prices are so high, just tell yourself to eat less. Get everyone to do it, and prices are sure to fall. You can afford to eat a bit less. That food isn't good for you anyways.