Wednesday, September 30, 2009

Additional Thoughts on School Canteen Food Pricing

Just some additional thoughts on the pricing of school canteen food. Previously, I noted that lower rentals was a bad explanation for the lower pricing of school canteen food. What are good explanations, then?

The first is that there is a price cap on the food price, explicitly imposed by the school through the tender bid, or implicitly in a sort of quid pro quo arrangement. Another realistic explanation is that school students have more limited resources, meaning that vendors lose profits if they raise the food price beyond the buying power of the students.

A friend brought up the idea of an ethical vendor selling food at a reduced (but still profitable) price. This too is a possible solution. However, I am more interested in the implications of introducing a single sub-optimal (or ethical) vendor into the market.

Making the standard economics assumptions, the sub-optimal vendor, by virtue of undercutting the competition, receives all the business. This state of imbalance results in ALL other vendors lowering their prices to match this sub-optimal vendor. This result is amazing.

I can imagine schools using this effect to the students' advantage, by setting up a single sub-optimal vendor, hence forcing the other vendors to that same price level. Students can even perform the role themselves by setting up some competing co-operative.

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