A Slate article mentions that the annual price of a hot-dog stand license near the Metropolitan Museum of Art in New York City is $362,201. Licenses are very limited and are bought at auction. The price presumably reflects the economic rent associated with the particular site (the price would be a lot lower in the middle of Central Park). Yet at a fixed cost of $1,000 per day, how can a hot-dog vendor make enough money to cover his variable cost, including the value of his own time?
If, on average, he sells only one hot dog and drink every minute the Met is open, with about 500 average daily opening minutes, that’s 500 servings per day. If he charges $3 for a dog and drink, his revenue of $1,500 leaves him $500 per day to cover variable costs. Seems possible, but I would expect that he’s not making economic profits.
If the city were to issue many more licenses, we would see more vendors, cheaper hot dogs, but, in the end, no higher net returns to the vendors.
(Hat tip: T.W.)
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Your estimates are conservative and I suspect that is because I see little value in operating at a loss-leader in this scenario.
Seasonal shifts as well as weekend sales could offset the costs. The article states 5 million visitors and to cover the rent the vendor would have to sell about 330 hot dogs + drinks a day or a 120K hot dogs + drinks a year which means that 2.4% of the 5 million visitors would need to purchase hot dogs. Considering that the vendor has a near monopoly this is not that far fetched. In fact, a lot of people may opt to just purchase a drink on a hot day or a 1000 drinks a day which is again very doable with 5 million visitors with a near monopoly (7% of the people would have to purchase a drink).
Then too I am certain price differentiation can drive up the Average Selling Price (ASP) over $3 by selling hot dogs that cost more than $2 and/or selling drinks that cost more than a $1.
And again the vendor could practise sheer price discrimination against willing buyers or naive tourists by just quoting them $15 for the two hot dogs he just served (not everyone asks the price before and if he is smart he won’t post the price). I have seen many vendors do this.
If you bump the revenue per customer to $5 then only 1.4% of the 5 million visitors need to make purchases. Again not that far fetched.
The novice vendor that got kicked out probably didn’t operate smartly enough.
This is very similar to the taxi medallion market. The high price of the medallions and the actual taxi rates do nothing to help the economic situation of the drivers themselves.
It’s pretty easy to figure that he can make more money with the investment, so I don’t believe it. Perhaps the license is resaleable like a cab medallion, perhaps the figures are wrong. Perhaps they sell a big bag of drugs carefully folded into the napkin….
But the figures as stated make no sense.
I bet they make pretty nice profits. They’re not just selling hot dogs. Drinks, ice cream, pretzels. And all mark up “outrageously” (though considering rent it seems reasonable).
#4 for the win.
1) ad revenue.
2) there may be a franchise helping them out.
3) have you ever been to the met on a nice weekend during lunchtime?? let’s say the average person spends $8 there: $5 hot dog, $3 drink – which is probably low. if they can serve two people a minute – also probably low – then they can serve 120 people an hour. that’s $960 AN HOUR!
$1000 a day really doesn’t seem so difficult when you look at it that way.
You’ll probably pay $3-$5 for the hotdog alone and another $2 for the drink.
And he would have bought the dog,bun, napkin, dog plate for about 50¢ total…
No one makes economic profits in the long run. In fact, there is probably so much rent seeking going on in the permit auction that monopoly profits are not being made, either.