I like the argument that the scaling should make the average marginal cost per plate lower in restaurants than at home, but I find cooking at home being cheaper not weird at all. First, there are also real fixed costs to account for, not just regulatory costs.
More importantly, the average price per plate is not just a function of costs, it’s a function of the value that people receive. Cooking at home does give some nice benefits, but eating out gives some huge ones: essentially leisure, time savings (a lot of things get prepped before service), no dishes, and possibly lower search costs (“what’s for dinner tonight?”).
More importantly, the average price per plate is not just a function of costs, it’s a function of the value that people receive.
No, willingness to pay is (ideally) a function of value, but under reasonable competition the price should approach the cost of providing the meal. “It’s weird” that a city with many restaurants and consumers, easily available information, low transaction costs, lowish barriers to entry, minimal externalities or returns to atypical scale, and good factor mobility (at least for labor, capital, and materials) should still have substantially elevated prices. My best guess is barriers to entry aren’t that low, but mostly that profit-seekers prefer industries with fewer of there conditions!
Supply side: It approaches the minimum average total, not marginal, cost. Maybe if people accounted for it finer (e.g., charging self “wages” and “rent”), cooking at home would be in the ballpark (assuming equal quality of inputs and outputs across venues..), but that just illustrates how real costs can explain a lot of the differential without having to jump to regulation and barriers to entry (yes, those are nonzero too!).
Demand side: Complaints in the OP about the uninformativeness of ratings also highlight how far we are from perfect competition (also, e.g., heterogeneous products), so you can expect nonzero markups. We aren’t in equilibrium and in the long run we’re all dead, etc.
I’m a big proponent of starting with the textbook economic analysis, but I was surprised by the surprise. Let’s even assume perfect accounting and competition:
Draw a restaurant supply curve in the middle of the graph. In the upper right corner, draw a restaurant demand curve (high demand given all the benefits I listed). Equilibrium price is P_r*. Now draw a home supply curve to the far left, indicating an inefficient supply relative to restaurants (for the same quantity, restaurants do it “cheaper”). In the bottom left corner, draw a home demand curve (again the point is I demand eating out more than eating at home). Equilibrium price for those is P_h*. It’s very easy to draw where P_h* < P_r*.
I like the argument that the scaling should make the average marginal cost per plate lower in restaurants than at home, but I find cooking at home being cheaper not weird at all. First, there are also real fixed costs to account for, not just regulatory costs.
More importantly, the average price per plate is not just a function of costs, it’s a function of the value that people receive. Cooking at home does give some nice benefits, but eating out gives some huge ones: essentially leisure, time savings (a lot of things get prepped before service), no dishes, and possibly lower search costs (“what’s for dinner tonight?”).
No, willingness to pay is (ideally) a function of value, but under reasonable competition the price should approach the cost of providing the meal. “It’s weird” that a city with many restaurants and consumers, easily available information, low transaction costs, lowish barriers to entry, minimal externalities or returns to atypical scale, and good factor mobility (at least for labor, capital, and materials) should still have substantially elevated prices. My best guess is barriers to entry aren’t that low, but mostly that profit-seekers prefer industries with fewer of there conditions!
Supply side: It approaches the minimum average total, not marginal, cost. Maybe if people accounted for it finer (e.g., charging self “wages” and “rent”), cooking at home would be in the ballpark (assuming equal quality of inputs and outputs across venues..), but that just illustrates how real costs can explain a lot of the differential without having to jump to regulation and barriers to entry (yes, those are nonzero too!).
Demand side: Complaints in the OP about the uninformativeness of ratings also highlight how far we are from perfect competition (also, e.g., heterogeneous products), so you can expect nonzero markups. We aren’t in equilibrium and in the long run we’re all dead, etc.
I’m a big proponent of starting with the textbook economic analysis, but I was surprised by the surprise. Let’s even assume perfect accounting and competition:
Draw a restaurant supply curve in the middle of the graph. In the upper right corner, draw a restaurant demand curve (high demand given all the benefits I listed). Equilibrium price is P_r*. Now draw a home supply curve to the far left, indicating an inefficient supply relative to restaurants (for the same quantity, restaurants do it “cheaper”). In the bottom left corner, draw a home demand curve (again the point is I demand eating out more than eating at home). Equilibrium price for those is P_h*. It’s very easy to draw where P_h* < P_r*.