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Thursday, July 13, 2006



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New Economist

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I find this deeply unpersuasive:

«In addition, the price gap between the most highly rated Parisian restaurants and the average Parisian restaurant has increased steadily. The most highly regarded restaurants have continued to improve their design, décor and level of comfort, again as measured by the Michelin dining guides. In the first half of the 20th century, it was not hard to get highly regarded Parisian food without also paying for the accompanying fineries and status. But that is no longer the case.»

Because you cannot just add to the luxury and raise prices; customers have to be able and willing to pay those prices, and your competitors must not offer lower prices.

In general my expectation that those prices have risen a lot faster than inflation for the same reason that university fees in the USA have risen a lot faster than inflation: because they are nontradeable luxury services:

* Things that are tradeable (goods, services) have gone down in price. and this increases the relative pricing power of the rest.

* More international and prosperous elites can bid up the price of the luxuries they want, whether they be a3 star meal or a Yale degree.

The «fineries and status» tend to be there to help justify the price more than to drive it.


"Because you cannot just add to the luxury and raise prices; customers have to be able and willing to pay those prices, and your competitors must not offer lower prices."

Do you know that the Parisian market for "designer" fashion (Christian Dior, Lagerfeld, etc.), meaning the "filthy rich", is not more than 700 to 800 women around the world.

The price of such goods is practically inelastic to this crowd, like petrol or gas. If you are filthy rich, then a dress that costs 100 or 1000 times more than the one you will see in the upmarket department store is not a real hurdle.

More so, the Galliano designs that come off the runways are copied immediately. Material is manufactured/bought and stitched together so as to have a similar product in the department stores with 4 to 6 weeks, all of which guarantees the fashion's almost instant obsoleteness. The designers make their money from individualizing their designs for their large-handful of customers.

Almost the same can be said of food. Competitors have no reason whatsoever to lower their prices. None, zip, nada. It will not attract that many more customers as much as product differentiation may draw then in.

In fact, they want simply to provide the same experience (but different) in hopes that they appeal to those most able to afford the price ... and this market is sufficiently abundant, particularly in the large metropolitan cities where business generates enormous wealth.

My only wonder is this: Two thousand years ago, was Rome not similar? Whatever did one do when they had too much money and no idea of what to do with it? They too participated in conspicuous consumption, I suspect.

Times change. Mentalities don’t change all that much, certainly amongst the rich.


"Their message is that status and image — not just food — play an increasing role in high restaurant prices."

A bunch of savants have just discovered this? "Ho hum", was heard said amongst the French gourmet chefs, "So what else is new?"

Gourmet restaurants function on three key components:
1) Excellent quality in the produce employed,
2) Genuine artistic talent in their combination to concoct fine dishes,
3) Military execution in the kitchen and in the service.

A Harvard Business School professor, in the seventies, interested in studying how great chefs consistently produced and delivered high-quality meals, focused upon the above three ingredients ... and insisted on the third.

The French are deeply attached to their “terroir” (local produce), which is amazingly varied. They have also established a refined quality-assurance system that delivers consistently good produce to the local markets and is renowned.

Finally, and most importantly, the chefs are the "chiefs" in their domain. Good execution is paramount. A great many people may be able do develop a fine tasting recipe, but to do so consistently takes enormous talent. Reproducing the dish requires a kitchen staff that is talented, well coordinated and almost slave-like in execution of their tasks.

Pricing is practically inelastic in this market. Real competition enters at much lower levels. Also to be considered is a trend that has seen the depletion of mid-category restaurants, whilst a concurrent increase in both up-market and more so of low-cost fast food eateries.

The three key attributes mentioned above are not necessarily economic parameters amenable to statistical analysis. But, I venture to guess that the study mentioned, based upon Zagat's customer reviews, does not take into account the customers that matter most - repeat customers. In any given city, particularly Paris, the customer base of those rich enough to afford repeatedly a 5-star Michelin restaurant are a finite number. If they keep coming back it is because of both consistently high quality as well as product differentiation (meaning variety of the menu).

Restaurants such as Maxim's, though popular, are not in this category, since they depend largely upon a reputation that is historical and therefore a tourist clientele. I.e., the study may have been analyzing apples and oranges, only to find that both a fruits.


«The price of such goods is practically inelastic to this crowd, like petrol or gas.»

Sure, but the question here is not ''why top restaurant prices are so high'', but ''why they have risen so much, from an already high level''.

Now the crucial thing about top restaurants is that their supply is unelastic; that is, they have so many tables and it is pretty hard to increase the numbers.

Restaurant owners can charge whatever price fills the tables. Now what has happened is that this price has gone up, from high to very high. Which means not so much that customers are more willing to pay higher prices (because they would have been willing in 1950 too), but that there are more customers that are willing.

Basically that seats at a parisian restaurant are non tradeable, and increasing prosperity at the top means that higher prices are needed to restrict access to ever wealthier customers.

Arthur Eckart

Thomas Malthus believed the supply of food would grow at a steady rate, while the demand for food would expand at a geometric rate. So, catastrophic events to control population growth would be a correcting mechanism (which is why economics is called the dismal science). Perhaps, one reason why prices at top restaurants increased so much is the number of high quality chefs may be a fixed percentage of the population, while the number of rich is an increasing percentage. Also, there hasn't been a catastrophic event to close that possible disparity, perhaps at least since the Great Depression.


I would be interested in the change in land value in those locations over the same time period. I would expect they would track quite closely.


«change in land value in those locations over the same time period. I would expect they would track quite closely.»

Land is not tradeable either :-).


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