Menu Pricing: An Experimental Approach

Abstract

Menu-pricing schemes in restaurants are often based primarily on markup-over-cost methods. More sophisticated techniques make use of ideas about consumer demand as well as cost. We propose an experiment for determining the effect of price on the quantity demanded of a menu item. We ran the experiment in a restaurant. The technique is clearly feasible. In our case, the demand was found to be quite inelastic over the price range considered, indicating that the restaurateur had much more flexibility in pricing than he thought a priori. We caution that our focus is on an elasticity of substitution among menu items. Our results do not address the effects of across-the-board price increases.