Home > Behavioural Economics, Supply & Demand > A glut of lobsters but why are prices in restaurants still high?

A glut of lobsters but why are prices in restaurants still high?

Maine LobsterThis week James Surowiecki in The New Yorker addressed the issue of the bumper lobster harvests but the high prices of lobster in restaurants. In the state of Maine, on the east coast of the US, lobsters off the boat were selling for US$6 / pound in 2005 in contrast to today where the wholesale price is as low as US$2.20. Therefore why have the prices in restaurants stayed high when you consider the wholesale price?

One logical reason is that ff there is a bad harvest and prices rise, restaurants might find it hard to sell expensive lobster to customers who have got used to it being cheaper.

Lobster is more like a luxury good than a commodity and therefore has a range of psychological factors:

1. High lobster prices became an important image on the menu – studies have shown that people enjoy cheaper wine when they do blind taste tests. If lobster was priced like chicken people wouldn’t enjoy it as much.

2. Customers often correlate price with quality. As the majority are not aware of what is happening on the lobster wholesale market they could presume that the quality of your lobster is not as good as your competitors – low price creates suspicion.

3. By making lobster expensive it make other items on the menu look more reasonably priced. A classic experiment described by Itamar Simonson and Amos Tversky showed that if you asked people to choose between a mid-priced microwave oven and a lower-priced one sales of the products were roughly split. But adding a higher-priced oven to the mix increased sales of the mid-priced product by forty per cent—the mere presence of a more expensive option made the moderate one look like a better buy. So any restaurant that cuts lobster prices significantly runs the risk of making that sesame-crusted tuna look too pricey.

4. Finally. although there is a lot of competition amongst restaurants very few customers would pick restaurants on the price of lobster.

The graph below is from James Surowiecki’s blog on The New Yorker website.
Lobster Prices

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  1. Alan
    August 27, 2013 at 7:09 pm

    Lobsters are the next Chicken as the demand for lobsters increases the farm production increases which leads to surplus supply. This leads to the reduction in the wholesale prices. About the cheap wines tasting better….. same theory applies as the most popular taste leads to high demand which leads to mass production which reduces cost. The only way you can preserve it is have regulations or the substance should be rare something like the diamond which i also believe was what Debeers have done…..same theory …..in short its the demand and supply theory that really plays everywhere.

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