Sunday, September 21, 2008

Overpriced stuff

One time, a friend asked me why I don't order alcoholic beverage at restaurants. To start with, I don't really like alcohol. The real reason, however, is that they're seriously overpriced.

If you buy a pack of 30 Budweiser beer at some supermarket, it probably costs you less than $1 per can. Get it at a restaurant like Yard House? It'll cost you at least $5 per glass. That's a 500% increase in price.

Well, in a free market, price is determined by supply and demand. How can something be overpriced?

That's true in a market with competitors who can compete freely. When you're having dinner at some restaurant, there's no way you can go to the Albertsons next door to buy your own beer. The restaurant has basically become a monopoly in the dining area "market"; if you want a taste of alcohol, you gotta buy a glass from them.

There are many examples of these artificial monopolies in one's daily life like:
  • Coke and popcorn in a theater
  • Drinks and dessert at a restaurant
  • Fast food at an airport
  • Parking at some event/fair
  • Any food in a theme park
I know that you're not only paying for the beer but also the service, environment, atmosphere etc. of the restaurant. Still, when you overprice the products to a certain degree, I just can't help feeling ripped off when I pay you. In general, I consider something as way overpriced if you're asking for 100% more than the average price. 500%? Forget about it.

What actually puzzles me is that many Americans are happy paying for all these overpriced goods (using their credit cards probably). If they're not doing that, these businesses may be forced to lower their prices and thus benefiting more people.

You may say that these are just different ways of marketing. Business A sells cheap and profit from quantities while Business B sells way high and profit from the large margin. At the end, both Business A and B make the same amount of money so they're even, right?

To me, there're at least two advantages for Business A:
  • You create good will because your customers don't feel ripped off; in fact, most people are happy when they think that they get a good deal.
  • If you're talking about food business, Business A's food will be fresher since it's not kept long before it's sold to the customers. For non-food businesses, I believe that Business A has a more flexible cash flow.
I've yet to see a theater that doesn't overprice their drinks and snacks. Maybe it works, maybe it doesn't; it doesn't sound so bad as a new business idea to try out though, right? I promise I'll grab a bag a popcorn for my next movie if you try that :P