Saturday, 13 February 2010

Markets in nothing: El Bulli

Economics appears to have failed today.

El Bulli ("the world's best restaurant") is permanently closing in December 2011. According to owner Ferran Adria, it's because they are losing half a million euros per year. This poses two problems for economic theory.

First - why is it losing so much money when demand is so high? The 48-seat restaurant has a six-month season with about 8,000 covers a year. It receives 300,000 applications for those seats [though this article says a million and this one two million], selling out the whole year's reservations on the same day that bookings open for the season. Why wouldn't they bump up the price from 230 to 330 euros, to simultaneously manage demand and eliminate the losses? Price elasticity can't be that high.

Second - why is there no resale market in the small number of reservations available? Neither the US nor UK Ebay site has any results for El Bulli, except a few copies of the cookbook. Normally, when a venue imposes an artificial price ceiling, it creates a thriving market for scalpers. Now I'm sure the restaurant does not approve of reselling its reservations, but if "John Smith" books a table for six - even if he decides to use his own name and turn up himself, it wouldn't be so hard to sell the other five seats for a couple of thousand dollars each.

Of course there are many theories for why concerts, sport events and so on are sold below market price. Often the argument rests on the sale of ancillary products, and Adria does sell consultancy, books and other products which cover the restaurant's losses. But this doesn't answer the question: an extra €100 on the bills surely would not damage his culinary reputation at all, and if he closes the restaurant, sales of the other services will be hurt too.

Possible explanations?

  1. The 300,000/one million/two million applications every year are fictional. In fact, just 8,000 people apply, prices are already at the revenue-maximising level and the business model simply isn't viable.
  2. Adria was right the first time, when he said he was stopping not because of money, but because of the 15-hour days. His utility from leisure is greater than the attainable revenue from the restaurant.
  3. Irrespective of the current pricing policy, the marginal product of training new chefs (Adria plans to replace the restaurant with a culinary academy) is greater than that of cooking new meals.
  4. The endowment effect means that those who have a reservation value it much more highly than potential bidders who do not have one.
What are your theories?

Updates: According to some other blogs, it isn't closing permanently at all!

But despite that, I've already started getting Google hits for "El Bulli reservations for sale".

1 comment:

Tom Hickey said...

Quit when you are ahead. It's pretty clearer something else is in the works. Probably figured it's a lot simpler to trade your rep than make stuff for a few folks, even at very high prices.

Why would Oprah close down her show? Something else in the works.