An economic mystery at the all-you-can-eat buffet
JUANA SUMMERS, HOST:
Our colleagues at Planet Money like to look for economics in the darnedest (ph) places. Recently, they went to Las Vegas to explore an economic mystery at - get this - the all-you-can-eat buffet. Erika Beras and Jeff Guo have the story.
ERIKA BERAS, BYLINE: That mystery is called the flat-rate pricing bias.
JEFF GUO, BYLINE: And to explore it, we met up with Eric Chiang. He's an economics professor at the University of Nevada, Las Vegas and a buffet connoisseur. Eric took us to one of his go-to spots.
ERIC CHIANG: OK, let's go back in the main entrance here.
BERAS: According to legend, the all-you-can-eat buffet was born in Las Vegas. And this all-you-can-eat pricing model - the economics term for it is flat-rate pricing, where you pay one price to use a service as much as you want.
CHIANG: For example, your wireless plan - you may have all you can text and talk on your plan.
GUO: Yeah, unlimited.
CHIANG: Unlimited talk and text. Absolutely.
BERAS: You see flat-rate pricing in a lot of places - public transit, gyms, streaming services and, of course, buffets.
GUO: So we're only paying $17.95?
BERAS: Lucky us.
GUO: But the mystery with flat-rate prices is that in a lot of cases, it's actually a bad deal. For instance, studies have shown that many people would save money if they switched their cellphones from unlimited data plans to buying data a la carte.
BERAS: So why do people gravitate toward flat-rate pricing? What explains the flat-rate pricing bias? Economists have come up with three reasons.
GUO: First is the idea that people are just irrational. They overestimate how much food they're going to eat at the buffet or how many cellphone minutes they're going to use each month.
BERAS: But Eric says there's another explanation - a more rational one.
CHIANG: Consumers don't like to feel like every unit of a product they consume, they're going to be charged for. This is often called, like, the taxi-meter effect, where if you sit in a taxi, watching that meter keep ticking up - it has some really awful feeling.
GUO: So the idea is that people are willing to pay a premium to avoid that awful feeling, to avoid the pain of the taxi-meter effect.
BERAS: And related to that is the third explanation for why people opt for flat-rate pricing. It has to do with something that economists call the insurance effect. Think of it this way - if you're not sure how much data you're going to use in a month, an unlimited data plan saves you from the risk of an enormous surprise, unexpected bill. And at a buffet, the flat-rate pricing gives you the freedom to try as many new things as you want.
GUO: Because the cost of taking a risk at a buffet is...
CHIANG: Zero. If I don't like it, you just don't eat it.
GUO: Economists say that people are attracted to flat-rate pricing for a mix of all three of these reasons - the taxi-meter effect, the insurance effect and because they sometimes overestimate how much they're actually going to consume.
GUO: Julia Child, eat your heart out.
BERAS: If you want that, it may not be there by the time you come back for plate three.
CHIANG: I think it's worth trying.
BERAS: I think it's worth trying.
GUO: Jeff Guo.
BERAS: Erika Beras, NPR News.
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