Wednesday, September 30, 2009

Why is School Canteen Food Cheaper?

I asked myself, why is school canteen food cheaper? Then I asked other people too.

"The rent is lower", some said. This seems to be an insufficient answer. One notes that demand for food in school is largely inelastic; meaning, price does not have a large impact on resulting demand. In such a scenario, it behooves the canteen stalls to raise food prices to some higher level such that it actually has an effect on demand, thus maximizing profit.

I then thought of the following: First, a canteen stall must be (at most, and at least) as profitable as any food stall elsewhere; this is a consequence of efficient markets. Second, since the tender for canteen stalls is open, this means that the final rent for the stall will rest at a level such that it renders the business just as profitable as any food stall elsewhere.

Now, if there was no constraint on the food price, the bids for the stall will rise to a level such that the required food price would be at the maximum tolerable. This is as discussed earlier. Conversely, if the tender has some requirement or constraint on the maximum food price, then the bids on the tender will be lowered, such that profitability remains constant.

In other words, it seems that low rent is a effect, not a cause, of food price being cheap. The real reason why school food is cheap is due to constraints on the food price, whether explicitly imposed due to contractual requirements, or implicitly through agreement (i.e., threat of tender being rejected/non-renewed if price complaints are made against the canteen vendor).

No comments: