I love the Pizza Hut buffet. It’s £4.99 for all the pizza you can eat – although drinks are not included, which is one of the ways they make their money, obviously. What’s the other way they make their money? Well, I’m sure the £4.99 price tag didn’t come from just anywhere. They know that the average person only consumes a certain amount of food before they are satiated, and so they would have calculated that people are unlikely to actually eat £4.99 worth of food.
A nice way to analyse this is to use very simple marginal cost/benefit analysis.
As a consumer, when you consume a good, you receive a certain amount of utility (which is the technical term for some sort of positive sensation gained). But we don’t necessary think of absolute utility all the time. The important consideration that we make when deciding whether to have an extra slice of pizza or not is how much extra utility that slice will give us. This is known as marginal utility – the benefit you gain from consuming one extra unit of a particular good. Similarly, marginal cost is the cost of one extra unit.
In our pizza case, the overall cost of eating pizza (I’m ignoring salads and other stuff for the sake of simplification) is £4.99 but the marginal cost is £0 because you pay nothing for each additional slice of pizza that you eat.
Of course, the marginal benefit from eating a slice of pizza will be different for everyone. But a common characteristic of marginal utility (in most cases) is that it is diminishing. This means that for every extra unit of something you consume, the next unit will give you slightly less pleasure than the previous one. For example, if you were quite poor and managed to get your first house, you would (understandably) be extremely happy. If you then became a property tycoon with 100 houses and you bought your 101st house, it (probably) wouldn’t give you as much pleasure as when got your first house. Makes sense right?
So for pizza (and indeed food in general), you will be less and less satisfied with each extra slice you eat. In fact, you will get to a point where you start to feel very sick, and then you would gain negative utility (feel worse) by eating another slice.
As always, it’s nicer to look at this visually.
Here, you can see the constant marginal cost of £0. I have tried to estimate what my marginal utility curve could look like, based on the fact that I usually eat 3 slices of pizza (try and do your own – give a numerical value to how much you would enjoy eating each additional slice of pizza and plot them on a graph. Eating a real pizza may help, but I’m not responsible for any diet plans you may be breaking…). I’ve simplified things by drawing a straight line, but in reality, the MU curve is likely to be just that – a curve.
The blob at the start just means that the MU curve jumps. At 0 slices, I don’t get £5 worth of utility – I get nothing. But as soon as I start eating (even a bite), I start receiving a benefit – hence the curve jumps up. The circle just means that the point at 0 pizzas is excluded from the curve. Ignore it if you don’t understand – it’s not that important for what I’m getting at.
As a rational consumer, you will eat pizza when your marginal utility exceeds the marginal cost (so in this case, when your marginal utility is positive). The optimal consumption for you is when marginal cost is equal to marginal utility. This is a key economic principle. After that point, any more you consume will be overshadowed by the cost of consuming it.
In my case, my first slice of pizza gives me between £3 and £5 worth of enjoyment, but this drops until I have consumed my 3rd slice, where I get precisely nothing for any more I decide to eat. So 3 slices is my optimal consumption for the buffet – and Pizza Hut are having a field day because 3 slices of pizza do not in the slightest bit cost £4.99.
As I mentioned, you will probably get to a point where you feel worse by eating more pizza. In the graph, this is highlighted by the fact that if I were to consume a 4th slice, I would lose utility. In fact this means that if I were forced to eat a 4th slice, I would rather pay some amount less than my disutility (say 75p) not to eat it!
Again, your graph may have a different crossing point, but at some stage, you would rather pay than eat another slice.
Consider this hypothetical scenario:
Pizza Hut change their buffet so that you pay a fixed fee of £2 to eat as much as you like. The caveat is that they will keep bringing you pizza, which you must eat until you pay them £2.99 to stop.
The overall cost is the same as the original buffet – £4.99. Suppose I have the same preferences and so my graph is still the same as above. It still makes sense for me to eat 3 pizzas because the marginal cost is still zero. But now, I must pay £2.99 to stop eating. Since this cost is greater than the cost of eating another slice, I’d rather eat a 4th slice of pizza. Actually, I’d quite possibly also eat a 5th slice of pizza before my disutility exceeds £2.99. This means although I’d be paying the same amount overall, I’d end up eating more pizza than I would have liked!
In reality, people may be less myopic than this. To calculate the degree of foresight and so on, we’d have to delve deeper into economic theory. If we were to get more technical – we would have to consider the degree of discount factor, the type of discounter that the individual is and then discount over an infinite time to figure out precisely when that individual would stop eating.
Whilst I won’t go into that, it is interesting to note that people with a low discount factor (ie. people who don’t care/think about the future very much as opposed to now) are more likely to over-eat since they would practically ignore the £2.99 they will inevitably have to pay in the future. This makes practical sense as well – people who eat too much are less likely to have thought about all of the consequences (indigestion, weight-gain etc.) that they will face in the future.
Overall, it’s interesting that something as simple as changing the pricing structure (not even the actual price) can affect our consumption of a good.
Do you think you would over-eat in this situation? Please leave a comment – I’m interested to find out how different people think about their decisions!