Here, Piggy, Piggy

When is it not good for your customers to be consuming larger quantities of your product? When you’re not charging them for it. I was reminded of this as we drove past a Golden Corral restaurant. For those of you not familiar with this establishment, they offer “a famous buffet containing an array of food choices including hot meat options, pasta, pizza, fresh vegetables, salad bar, and a selection of carved meats.”

Buffets face an interesting pricing challenge caused by information asymmetry. Say the population is composed of both big eaters (let’s call them “piggies”) and small eaters (“budgies”). The restaurant can’t tell whether a particular customer is a piggy or a budgie, while that customer knows whether he plans to pack away enough food to sustain a winter hibernation (different knowledge = information asymmetry).

The easiest solution would seem to be to simply set a price that splits the difference between the cost of serving piggies and budgies. But, that’s not going to work due to adverse selection. Who’s more likely to be attracted to a buffet? One might argue that it’s those who appreciate the utility from being able to choose from a variety of “hot meat options” (and pizza, too!), but it’s most likely to attract big eaters. That’s the adverse selection – the restaurant ends up “selecting” more of the “adverse” types. The price needs to reflect this fact.

By the way, Golden Corral is obviously doing a decent job of solving this problem (along with the moral hazard problem – once you’re at the buffet, you are tempted to become a piggie). According to this press release, their second quarter 2007 sales exceeded $350 million.