Ah, lunch at Fortnum & Mason in London — without doubt, the most posh place we ever have lunch at. By the time we get to dessert, we only have enough stomach room to split a piece of chocolate torte. But the cheese plate intrigues me — both for its culinary delights and its price structure. After over 300 years in existence, Fortnum probably has the pricing nearly perfect to maximize profits from cheese servings; so I assume that the lower marginal price for the 4th and 5th slices of cheese (£1.50 each), compared to the 1st through 3rd (£4 each) makes sense. Even a cheese addict (which I am) would be satisfied with 3 slices, so that at 4 or 5 slices for dessert the demand elasticity is probably quite low. The only way they’ll sell these is by cutting price a lot — probably still profit-increasing, given the quite low marginal cost of an extra helping of cheese. Thus demand-based price discrimination would dictate this non-linear pricing structure.
Pricing Fancy Cheese
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In the restaurant business, having a wait station deliver an empty plate plus silver is a certain cost (not to mention the nappery). The food is additional. As another example, consider a steak costing $15 per pound–very high class protein. If the lady’s cut (say, 8 oz) with whatever comes with it as an entree is $40, and the he-man cut (16 oz–twice the protein) is a $55 dish, the restaurant isn’t losing money. Especially since the guys usually want the meat barely cooked, so no higher chef’s labor.
There’s nothing on the menu stating (or even implying) that the total quantity of cheese is going up with the additional expenditure. It seems quite plausible to me that that “selection of five” has five smaller pieces of cheese. Meaning you’re paying only for choice, not volume.
I encountered the opposite at a restaurant last night. It was $19 for 3 cheeses, but $32 for 5 cheeses. So, they were charging $6.33 per cheese for the first three and $6.50 per cheese for cheeses 4 and 5. Any logic behind charging a higher marginal price for the additional two cheeses?
Hi, I was discussing this with some colleagues at School. If the demand is highly inelastic, won’t reducing prices result in falling revenues, and thereby profits (even if marginal cost is very low). Any clarification would be helpful. thanks.