The Perils of Restaurant Week

Here in New York City, diners are lining up for the semi-annual ritual of Restaurant Week – it’s really almost a month – when some of the city’s finest establishments offer cut-rate meals. But if they thought about the economics of the event, they might prefer to stay away.

Consider an analogy: if someone offered you a Cadillac for the price of a Chevrolet, you’d probably be a bit suspicious. The same should be true when a restaurant that generally charges $90 and up for its nightly menu drops the price to $38. Why would the quality be the same?

To an economist, the biggest tipoff is that restaurants can choose whether or not to be a part of Restaurant Week. Those that do must be getting something out of it. Yet they don’t offer a low-priced menu every week, so the event must be an opportunity to make money in a way that wouldn’t work as a general rule. By contrast, business practices that are in place year-round are usually good for diners as well; the restaurant has to do things that generate benefits for its customers, or it will fail. Things that don’t work all year are, well, suspicious.

A recent article by Megan Willett offers some possible reasons why a restaurant might want to participate. One is to attract new customers by giving them a taste (literally) of the restaurant’s dinner experience. Yet if these customers could only come on a night where the dinner sold for $38, it’s unlikely they’d return at full price. So the loss leader argument falls flat.

Another notion is that the restaurant can offer food more cheaply because of economies of scale. If most diners are going to order the special Restaurant Week menu, it can be produced in mass quantities at a lower price. Yet it’s unlikely that a restaurant that regularly orders huge amounts of food would get much deeper discounts from its suppliers by buying, say, 100 portions of chicken instead of 40.

More likely, the low prices have to do with the chicken. You won’t be eating baby lamb chops or lobster on the Restaurant Week menu. Cheaper raw materials are the main factor that would normally allow a restaurant to lower its prices.

But there’s a limit to how much prices can drop, thanks to wages and overhead. So, as Megan points out, restaurants may skimp even more by shrinking portions or, when Restaurant Week dishes come from the regular menu, removing expensive ingredients.

The kicker is that restaurants are probably still making money on every customer, even when they slash prices during Restaurant Week. So if a three-course dinner costs $38 at a place with high overhead, the quality may actually be worse than a three-course dinner for $38 at a place with low overhead.

All that said, diners may still want to enjoy the ambience of New York’s most glamorous tables. They just shouldn’t count on an authentic culinary experience to match, or even one that tastes good.

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