C&B Notes

Discount At The Dock, But Not At The Table

Despite a glut of lobster that has more than halved its wholesale cost per pound in the past decade, the price of lobster dishes has not changed much in restaurants across the country.  Because of the crustacean’s status as a luxury good, a couple of cognitive biases are at play that provide this pricing power (and resulting better margins) to restaurants.

Where you won’t find much evidence of a lobster glut, though, is in American restaurants.  Even as the wholesale price of lobster has collapsed, restaurant prices for lobster tails and that hipster favorite the high-end lobster roll have stayed buoyant.  There’s more lobster out there right now than anyone knows what to do with, but we’re still paying for it as if it were a rare delicacy… So why aren’t we seeing markdowns?  Some of the reasons are straightforward, like the inherent uncertainty of prices from year to year: if a bad harvest next summer sent prices soaring, restaurants might find it hard to sell expensive lobster to customers who’d got used to cheap lobster.  But the deeper reason is that, economically speaking, lobster is less like a commodity than like a luxury good, which means that its price involves a host of odd psychological factors.

Lobster hasn’t always been a high-end product.  In Colonial New England, it was a low-class food, in part because it was so abundant: servants, as a condition of their employment, insisted on not being fed lobster more than three times a week.  In the nineteenth century, it became generally popular, but then, as overharvesting depleted supplies, it got to be associated with the wealthy (who could afford it).  In the process, high prices became an important part of lobster’s image.  And, as with many luxury goods, expense is closely linked to enjoyment.  Studies have shown that people prefer inexpensive wines in blind taste tests, but that they actually get more pleasure from drinking wine they are told is expensive.  If lobster were priced like chicken, we might enjoy it less.  Restaurants also worry about the message that discounting sends.  Studies dating back to the nineteen-forties show that when people can’t objectively evaluate a product before they buy it (as is the case with a meal) they often assume a correlation between price and quality.  Since most customers don’t know what’s been happening to the wholesale price of lobster, cutting the price could send the wrong signal: people might think your lobster is inferior to that of your competitors.  A 1996 study found that restaurants wouldn’t place more orders with wholesalers even if lobster prices fell twenty-five per cent.  As the study’s authors put it, “A low price creates suspicion.”  This helps explain one of the interesting strategies that restaurants have adopted to take advantage of the lower price for lobster: they keep the price of lobster entrées high, but add lower-priced items — lobster bisque, lobster mac-and-cheese, a lobster B.L.T — to the menu. That way, they can generate more business without endangering lobster’s exclusive image.

Lobster has also stayed expensive because it makes other menu items, particularly seafood dishes, look more reasonably priced.