Friday, March 9, 2012

Cork It!

The GTM's post on an unfortunate lunchtime incident at Ray's Hell Burger prompted me to think about a hidden fee that I recall finding shocking the first time I encountered it: corkage.

Now, I'm no expert here. My experience working in restaurants is limited to KU or line cook duties. I've never waited tables or performed Maitre[sic] d' duties, but I'm no stranger to the life restaurateur. I couldn't have been more than 19 or 20 the first time I got hit with a line-item gratuity, and I do recall many of my former workplace associates bludgeoning me with complaints of non-tipping customers who had indeed paid the gratuity (the line-item gratuity isn't paid out in cash at the end of a server's shift, at least at the places I've worked). So perhaps it's a bit odd that I was pushing 30 when I first encountered corkage fees.

For those of you still scratching your heads wondering what I'm talking about, it is common practice for most restaurants (ones that sell wine, anyhow) to assess a surcharge for patrons who elect to bring their own bottle of wine to dinner. The economics here are perhaps a little less clear than you might think. On one margin, perhaps BYO wine represents forgone revenue for a lucrative sale, but that assumes inelasticity and ignores second-order effects like the generosity of the drunk and the possibility of repeat play. All of this is very interesting, and good fodder for discussion (indeed, I had a nice nosh with a couple of my colleagues yesterday and it's all we discussed) but probably less relevant for EE than the surprise factor (or element, if you prefer).

Mungowitz was upset that he overpaid for service in Arlington. That's fine, but he's probably got a harder case to say that he was completely ambushed by some unknown hidden fee. Even without forewarning, there is enough tacit knowledge in society about certain unadvertised fees that a typical person shouldn't be exceptionally shocked when they show up. Corkage fees, at least the first time you encounter them, probably don't qualify. I assert (completely without any rigorous evidence) that more folks know about a gratuity surcharge than about corkage fees. There's at least a heuristic for a gratuity surcharge: tipping at eateries is pretty much ubiquitous. There exists no such heuristic for corkage--it's my bottle of Thunderbird (ha ha, just kidding, I prefer Ripple) so who does this restaurant owner think they are making me pay for something I already own? Why, that's a violation of euvoluntary exchange, right there. My conventional rights of ownership are being trampled. Forsooth!

Naturally, the extension is to imagine what other hidden fees might not be euvoluntary. Bank fees, credit card fees, processing fees, taxes(?), land use fees, airline fees... any number of surprising and unexpected transfers not directly related to the point-of-sale exchange of good or services for currency would qualify. Hidden fees clearly induce ex post regret, but does this imply that the exchange itself ought not have occurred? What fraction of trades end up being submarginal? How do consumers adjust?

h/t Zac Gochenour and Blake Johnson


  1. Consider corking fees as an attempt to capture monopoly rents without enforcing monopoly restrictions.

    Restaurants could disallow BYO wine to capture rents, but they would pay the opportunity cost of repeat sub-marginal customers. Many do this. Others mollify BYO types by allowing them to bring their own wine, but charge them a premium.

    Anytime BYO is restricted the monopolists have decided it's more profitable to capture their rents through the high prices of goods sold. Beer and peanuts at the ball park; popcorn and soda at movie theaters. The infield at the Preakness Stakes recently moved from BYO to on-site licensed sales to stop drunken Baltimore hooligans from terrorizing families.

    "Hidden fees" are not an extraordinary phenomenon; they are always an option for sellers and will be chosen when monopolist pricing and enforcement cost more than driving away sub-marginal consumers with corking fees.

  2. Sam, the fundamental conflict between the customer and the restauranteur is about ill-defined property rights. Recall that property rights are entirely arbitrary and highly contextualized. What seems like an analogous situation may in fact be very different, according to both law and custom. That is why I shall refrain from drawing the obvious analogy made elsewhere between corkage fees and restrictions on bringing in outside food.

    Whenever we see surprise regarding price, I'm tempted to fall back on the results we get from literature on hidden fees at hotels: there are sophisticated consumers, and naive consumers, and the unique mix of the two in a market determines the degree to which hidden fees are sustainable as a business strategy.

    In this situation though, I really do think it's about property rights. There are myriad rights you do not have in a restauranteur's establishment. You have to wear clothes. You have to wear shoes. You can't act belligerent. You can't eat off the floor. No matter how freaky perverted you are in your own home, you have to act like a "normal person" when you go out.

    Your license is extremely limited.

    If you take the opposite view, you might be pleased to note that restaurants actually *allow* you to do something like bring your own bottle of wine instead of outright forbidding it. They're responding to a demand, they do not have zero MC, and they're operating as monopolists once you're at the table (as the comment above suggests). I guess half of infinity is corkage fee? :D


Do you have suggestions on where we could find more examples of this phenomenon?