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Bar Economics

After a months of delays and an incredible level of hype, the new Melt Bar and Grilled opened last week two blocks from the house I just moved out of. For as long as I remember I've always wanted to live "right across the street" from some wicked cool place, like Melt. For a week and a half, I did.


But I digress... I was able to visit twice before I moved. While most people obsess over the place because of the sandwiches, I think the bar, with 70 seats and 30 beers on tap, is the best of Melt's features. Actually, it's not just the variety and the diversity, it's the prices. Beer prices at Melt are some of the cheapest in Cleveland Heights, even for many of the microbrews. I'd guess that about half of the beers on the menu are priced at $3.50.

So my question is: why so cheap? I've heard a few competing theories on this question, which I'll discuss below. If the owner of Melt wants to set the record straight, I welcome his comment. Until then, it's mere speculation.

Theory 1: Beer prices are kept low in an attempt to appease people waiting for a table. Melt has become someone notorious for long wait times for tables. Unfortunately, the Cleveland Heights store is in a bit of an urban wasteland - not particularly far from other destinations, but not so close that most people would leave and go walk to them. Why not grab some beers while waiting for the table? People don't like feeling like they're being gouged because there is no place else to go, so maybe Melt uses inexpensive beer to make people feel better about waiting 2 hours for a table?

Theory 2: Beer prices are priced low because Melt makes big profit margins on their sandwiches. I think this seems plausible to people who don't know much about the restaurant industry, but from what my research has turned up, drinks almost always have higher margins than food. That's not to say Melt isn't making any money on the sandwiches, but those sandwiches are very labor intensive compared to drinks, and I think that eats heavily into the profit margins.

Theory 3: The beer prices are set at the point that maximizes the bar's revenue. For those who remember Econ 101 from college, this is the point at which the marginal cost and marginal revenue curves cross. The idea here is that high prices will lead to fewer sales but more revenue per sale while low prices will lead to higher sales but less revenue per. At the profit maximizing price, the bar sells just the right number of drinks to make the most money possible. Maybe Melt's seemingly low prices are simple the result of this?

Comments

LKBM said…
The market will find the equilibrium, but an individual business would have a hard time figuring out where the supply and demand curves meet, especially within the first few weeks of business.

If it's a very crowded establishment, seems like higher prices would make sense. Maybe they underestimated the demand, though. The question becomes whether to raise prices (oh, that was just our grand opening special price) and risk angering customers or just keep them low.
Scott said…
Hey Rob, your new neighborhood is getting another place that will be in contention for best beer spot. It's called Rustico. http://www.arlnow.com/2010/04/09/new-challenger-for-best-beer-joint-in-ballston/

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