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Saturday, August 18, 2007

On the quest for Matthew Yglesias's Inner Economist and a good Lobster Roll.

Yglesias writes

The family was talking yesterday about why the lobster rolls are better at the Fishnet in Blue Hill than at the Bagaduce Lunch in Brooksville. People were bringing up micro-causal factors -- lobster to bread ratio, quantity of mayo, etc. I, however, equipped with having recently read Tyler Cowen's Discover Your Inner Economist had a macro-level explanation at hand. The Bagaduce Lunch as a very scenic location directly adjacent to an interesting reversing waterfall. Fishnet, by contrast, needs to make due with an uninteresting location in the non-picturesque part of Blue Hill.

Under the circumstances, nobody would go to Fishnet unless the food was reasonably compelling. Thus, given that the Fishnet has been in business for years, one should assume that its food is superior to that offered at superficially comparable, but better located, fried seafood outlets. At any rate, this insight mostly seemed to bore my family, but I think this sort of thing is interesting.

I comment

Dear Mr Yglesias

I think you are going to have to keep searching to find your inner economist. Simple economic theory does not suggest that a nice location implies lower quality food even on average. Less simple theory can give any implication you want (I have a challenge open for someone to come up with a policy so bad that I can't write a model such that it is optimal).

The aspects of simple economic theory which give your inner restaurant theorist trouble communicating with your inner economist (who is in there somewhere) are infinite greed and separable utility.

Your story about restaurants is not based on profit maximization. You assume that the way the market works is someone opens a restaurant and guesses on a good menu, recipes and prices and some survive and others don't. This is evolutionary economics and is (still) fairly heterodox. Otherwise you have to ask why the Bagaduce doesn't cook actually good food to serve in its nice location, raise prices and make a ton of money rather than just survive.

Also you have to ask how they can afford that location. If your explanation depends on miss-pricing valuable land overlooking reverse waterfalls it is very far from your inner economists heart. If you assume that the Bagaduce's owners could sell the valuable site for more than it is worth to them by finding someone who actually understands mayonaise, you must explain why they settle for less, that is, satisfice (a word loathed by mainstream economists even more than by normal people).

Another possible explanation of the lobster roll problem is that people are not willing to pay a high price for lobster rolls in a shack even though the combined pleasure of decent food and a reverse waterfall gives more pleasure than alternative uses of the money. That is, the sense that a price is unreasonably high causes displeasure beyond the loss of money.

Let's here what a mainstream economist (Robert Hall) has to say about that

But I will say that I did once try to convince Bob Hall at a restaurant in Palo Alto not to order wine: the fact that the wine would cost four times retail would, I said, depress me and lower my utility. Even though I wasn't paying for it, I would still feel as though I was being cheated, and as I drank the wine that would depress me more than the wine would please me.

He had two responses: (i) "You really are crazy." (ii) "Think, instead, that it's coming straight out of the Hoover Institution endowment, and order two bottles."

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