Dynamic pricing for foodies … and for electricity?

Lynne Kiesling

If you like to cook and to eat well in Chicago, you can’t avoid chef Grant Achatz (nor should you want to!). His signature restaurant, Alinea, was recently named the best restaurant in the U.S. and one of the best restaurants in the world, and he is a creative, if controversial, innovator of “molecular gastronomy”.

Achatz, with business partner Nick Kokonas, got the foodie chatterati talking again last week when they announced their new venture, a Chicago restaurant called Next. Next has two novel features: the menu will change every few months and will channel the food and atmosphere of a particular time and place, and the pricing is prix fixe along the lines of a concert ticket. The first time-place that they will feature is Paris 1912, the tail end of the Belle Epoque (one of my favorite artistic and culinary periods!).

The pricing of the experience as a prepaid prix fixe is interesting in and of itself, and other economists have commented on that since the announcement. But the feature that is likely to be of the most interest to KP readers is outlined on the restaurant’s FAQ:

How much?
A meal at Next will represent a great value. Depending on the menu AND what day and time you are dining, food will be $40 to $75 for the entire prix fixe menu. Wine and beverage pairings will begin at a $25 supplement. Next’s goal is to serve 4-star food at 3-star prices.

Tickets?
Yes. Instead of reservations our bookings will be made more like a theater or a sporting event. Your tickets will be fully inclusive of all charges, including service. Ticket price will depend on which seating you buy – Saturday at 8 PM will be more expensive than Wednesday at 9:30 PM. This will allow us to offer an amazing experience at a very reasonable price. We will also offer an annual subscription to all four menus at a discount with preferred seating.
Two walk-in tables will be available every evening.
The tickets will be available via our website, and we are building the reservation system from scratch to ensure the best customer experience. It will be simple to use, efficient, and familiar to anyone who has booked a show or travel online.

This is a pricing system for the foodie economist! Selling tickets in advance signals popularity to the seller, gives the seller more certainty about the number of customers and the amount they will sell, and enables them to optimize their purchases of inputs. They need only procure extra for the two walk-in tables, plus a cushion for mistakes and accidents. That’s one reason why they can expect to deliver “4-star food at 3-star prices”.

But the pricing feature about which I will rhapsodize is, of course, the dynamic pricing: “Saturday at 8 PM will be more expensive than Wednesday at 9:30 PM”. This price discrimination is brilliant but not novel, although its use in restaurant pricing is. It is a decentralized mechanism that enables consumers to sort themselves according to their their willingness to pay, their preferences and their price elasticity of demand while simultaneously enabling the seller to maximize revenue. Combined with the “concert ticket” design, this pricing structure generally looks like a good setup for profit maximization. And given what has driven Achatz’s popularity and the fact that the time-place “Paris 1912″ idea is more like entertainment than any dining experience I know of other than Medieval Times, I think the price discrimination is also a valuable way to allocate dining spaces over which there will probably be excess demand.

Given this innovation in an improbable industry, here’s my challenge to those of you who work in the electricity industry, in electricity policy, or electricity regulation: if a creative innovator can create so much new value for consumers in such an improbable industry by adopting such a contractual form and such a pricing system, why do you reject it so strenuously in electricity? The parallels are striking — potential restaurant customers have a range of preferences, incomes, willingness to pay. We all need to eat. Restaurants have high fixed costs (although of course not in the proportion that we see in infrastructure industries). Customers like me relish the thought of such a choice, and look forward to its availability. Why do you make so many customers worse off relative to the potential value they could achieve from innovation if you removed the barriers to innovation, product differentiation, and competitive choice in retail electricity markets?