Why We’re Wrong About Restaurants

Figuring out the macro impact of the virus, while not easy, is in some ways easier than figuring out a lot of the micro. In some cases the impact seems pretty obvious, and probably is: airlines are likely to carry fewer passengers, and more of them will be business travelers, for a while (resulting, by the way, in higher airfares in CPI). But some of the effects are much harder to figure out than we think, and a lot of it comes down to the fact that people who are idly speculating about these things tend to be pretty poor about defining what the substitutes are for any product or service.

Actually, the question of ‘what is a substitute’ turns out to be hugely important in economic modeling, because it directly impacts the question of demand elasticity. If I am the only person who sells widgets, and you need a widget, then I probably have a lot of control over what you pay. But if someone else sells something that works about as well as a widget (but isn’t a Widget™), then I as the supplier likely have a lot less flexibility and I face a more elastic demand curve. This is one reason that salespeople are taught to remember that the customer doesn’t want a quarter-inch drill bit; they want a quarter-inch hole. In a more formal setting: it is enormously important in antitrust economics that the market is defined clearly when considering if a firm is monopolizing or attempting to monopolize[1], so much so that there is an index called the Herfindahl-Hirschman Index with which industry concentration can be expressed. But I digress.

We read that many restaurants will fail as a result of the COVID-19 crisis, because quite aside from the question of the financial damage done to the restaurant owner from a two-month hiatus in revenues there is the question of “will people even come back?” And, if people do come back, but the restaurant-owner can only fit half as many people in the restaurant due to social distancing, then many restaurants can’t survive. Right?

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