GETTING THE SELF-SELECTION CONSTRAINTS RIGHT.

Economics is about incentives.  The rest is commentary.

Today's lesson is served up at the seafood buffet.  "Red Lobster says unlimited shrimp promotion was too popular and too cheap."  That's a standard problem in pricing bundles of service, you don't want to make the bundle you'd like the heavy eaters to buy attractive to lighter eaters who you'd prefer to eat a la carte.

Oliver Williamson's 1966 peak load pricing article (JSTOR) lays out the argument with some glorious Lagrangians and some intuitive diagrams. The high-occupancy toll problem (and the related problem of selling cuts in the roller-coaster line) is one in which the provider is simultaneously providing a premium service at a higher price and a congested service at a lower cash outlay, but with the people who choose the cheaper congested service incurring disutility. As a modeling exercise, the marginal commuter is indifferent between the marginal utility adjusted by the higher price of the premium service and the marginal utility adjusted by the lower price of the congested service.

The all-you-can-eat buffet is a related problem.  The way to encourage the lighter eaters to order a la carte is to make the all-you-can-eat bundle more expensive.  Red Lobster management figured it out.

Red Lobster's parent company, Thai Union Group, disclosed earlier this month that the seafood chain took an unexpectedly large loss in the third quarter of the year because its $20 shrimp promotion wasn't very profitable and was more popular than the company anticipated.

"The proportion of the people selecting this promotion was much higher compared to expectation," Chief Financial Officer Ludovic Garnier said in Thai Union Group's investor and media presentation Nov. 7.

Red Lobster has had an all-you-can-eat shrimp promotion for years, but this year it changed the shrimp deal from a limited-time offer to a permanent one. The company wanted to boost traffic in the third and fourth quarters of the year, when its business tends to slow down.

Garnier said the strategy worked, bringing in customers and bolstering Red Lobster’s market share. But the improvement wasn’t as large as the company expected, and combined with the low margins on the surprisingly popular deal, that presented a problem.

He said U.S. consumers are getting more budget-conscious, meaning they are eating at less-expensive restaurants and even ordering cheaper items when they go out. That contributed to the unexpected popularity of "Ultimate Endless Shrimp."

While the deal brought in some more customers, Garnier's comment suggested that people who might have ordered something on the menu that was more lucrative for Red Lobster instead traded down to the unlimited shrimp instead.

Study price theory, people.  The Williamson model and the self-selection constraints stipulate that whatever tariffs are offered generate enough revenue to cover the enterprise's costs.  "Those people who are willing to spend the larger sum of money [on the buffet, in this instance] are, consistent with the incentives of a fixed access fee, willing to consume the experience more intensively."

And that, dear reader, is why Weight Watchers recruits at the all you can eat buffet.