Meal deal economics

The law of demand is one of the most widely understood laws of economics: if you raise the price of something, fewer people will buy it; if conversely, if you reduce its price, more people will buy it.

The law generally holds true as long as the goods in question don’t have any special properties or constraints. However, there are a number of known exceptions, for example:

  • Veblen goods – expensive goods which are desirable for the status they confer on anyone rich enough to buy them. Contrary to the law of demand, demand for a Veblen good will rise as its price increases.
  • Giffen goods – a cheap but essential good which counter-intuitively increases in demand as its price rises. This is because, if a staple food (e.g. bread) rises in price, the poorest consumers have to stop buying more expensive foods (e.g. meat), and spend the savings on more of the cheapest good.

I hypothesise the existence of another type of good which behaves as an exception to the law of demand: a meal deal good.

For the benefit of anyone who’s not familiar with a meal deal, it’s a common lunchtime promotion in UK supermarkets. You get to choose one item from each of three categories: a main item (generally a sandwich), a snack and a drink. You then pay the meal deal price instead of the sum of the three items.

This gives the customer the opportunity to game the system, to try to get the best deal available. For example, an average selection of items would cost about 50% more, individually, than when combined in the deal. But by choosing the most expensive sandwich, snack and drink available, you can usually push this ratio to about 100%.

The chance to “get one over” on the retailer is irresistible to a certain type of consumer. Indeed, I’ve had many a conversation with work colleagues about which supermarkets and item selections provide the best value deal. It’s especially satisfying if it seems that the retailer hasn’t properly thought the promotion through, and has failed to exclude certain high value items (e.g. premium sandwiches) from the deal.

But the fact that a group of consumers place a value on something (beating the retailer) other than the qualities normally valued in food (its taste, nutrition, etc) results in counter-intuitive behaviour. The desire to game the system skews the system.

Imagine yourself as a consumer, buying a meal deal. If you’re determined to get the best deal, you have to buy one of the most expensive sandwiches. Now think of it from the retailer’s point of view. How do you price your premium sandwiches? By the normal law of demand, you need to strike the right balance, making it as cheap as possible to increase sales, while still making a decent profit.

But what if the vast majority of sandwiches are sold as part of a meal deal? The face value of an individual sandwich doesn’t really matter: as long as customers are using the deal, they’re not paying face value. So you can set it as high as you want. In fact, the higher you set it, the more attractive it becomes to a certain cohort of buyers: the ones determined to get the highest individual values from their meal deal items.

In other words, retailers could be gaming the gamers: setting the prices of items artificially high, just to increase their attractiveness in terms of perceived savings on the meal deal.

So, next time you’re buying a premium sandwich, consider whether the product you’re getting is really worth the price tag – whether or not you’re actually paying it.

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