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Demand and Supply: Lobster Economics

Aug 20, 2013 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Environment, Thinking Economically • 477 Views    No Comments

Today, a tale of two (lobster) cities.

Our story begins in Maine near the city of Portland. Last year, dipping from $5 to $2 or so for a pound, lobster prices plummeted. The reason was a perfect storm of demand and supply. On the demand side, Canadian processors’ were ordering less Maine lobster (the reason here at econlife). Meanwhile, supply soared as lobster predators like cod and striped bass were overfished and maybe, global warming made ocean water more lobster friendly. With less demand and more supply, you know what happens.

This year, low prices remained. As powerless price takers, subject to whatever the market dictates, lobster fishermen had to charge as low as $2.20 a pound.

Now though, for our second city, we can travel to NYC. Walk into any upscale seafood restaurant and a lobster dinner is pricey. Even if they wanted to lower their prices, it made no sense. A luxury item, a lobster dinner at bargain basement prices would make people suspicious. Furthermore, it is handy having an expensive lobster plate on the menu. Called an anchor by psychologists, a high priced dish makes other less expensive entrés look like a good deal. List one next to the other on the menu and you profitably shape diners’ choices.

At $155 (below), doesn’t the NY’s Balthazar seafood platter become a reference point?

Demand and Supply Balthasar Menu

The top half of a Balthazar menu.

 

 

As economists we can say that lobster fisherman and lobster restauranteurs compete in different markets. The fisherman is in a market that resembles perfect competition. With many sellers and many buyers, a homogenous commodity, and easy market entry and exit, the market has the power over its participants. It sets the price. By contrast, restaurants selling lobster are in monopolistically competitive markets. Because they have the ability to make themselves unique by differentiating what they sell, they have some control over what they charge us.

Sources and resources: Hat tip to James Surowiecki at The New Yorker for his excellent column on lobster markets and the perfect springboard for moving onward to Daniel Kahneman’s discussion of anchors and previous econlife posts on lobster pricing and restaurant psychology. To see the entire mouthwatering Balthazar menu, here is the original pdf.

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