In Kitchen Confidential, Anthony Bourdain makes the case that the entire restaurant industry—excluding things like fast food—rests on the delicate arrangement of dramatically marking up alcoholic beverages. Even the most expensive, high-end restaurant would fold tomorrow if all of its customers suddenly stopped buying any drinks. Essentially, food prices in restaurants are less than break even at the best of times, and relatively price-inelastic purchasers of drinks are all that keeps surviving restaurants barely alive. How did this strange arrangement even come about?
The restaurant industry comes close to being an absolute economic ideal in terms of providing maximum consumer value. Nassim Taleb also held it up as being the perfect example of the concept he calls antifragility; or being improved upon rather than harmed by volatility. Any given restaurant is extremely fragile, always right on the edge of unprofitability—or more accurately, constantly fluctuating below and above that line, with owners praying that on net it works out. They have to do everything in their power to attain mere survival; the failure rate among restaurants is very high.
In an industry like this, information flows very quickly and efficiently. The fact that people who go out to eat are in general more price-inelastic when it comes to the drinks they buy is not something that is obvious a priori. But the restaurant industry is a perpetual churn of businesses attempting any sort of pricing or quality experiment imaginable; if such an inelasticity existed, it was destined to be discovered. And once it was discovered, competitors would quickly imitate the discovery.
Is Bourdain right that losing this inelasticity would bankrupt the industry? We know this is not the case—restaurants continued to operate during prohibition, after all, and it is not as though they were all simply breaking the law to do it. No, what would happen is that food prices would have to go up even more. Since people are clearly more elastic to food prices than to drink prices—the proof of this is the fact that the present arrangement is what it is—there would probably be a contraction in the number of restaurants that could operate, as less money flowed into the industry. This need not be a long run contraction—restaurateurs would perpetually be looking for the next great mechanisms to elevate their financial circumstances to net profitability on a more regular basis. But given that they haven’t found another one yet, odds are there would be at least a short run contraction.
So what of the news industry? Mathew Ingram and many others have made a good case that losing the ability to bundle news with classifieds may have had a similar effect on news that losing higher surcharges on drinks might have on the restaurant industry. However, Ingram’s piece also discusses other sorts of content that are increasingly being bundled in with news as well. And Timothy Lee points out that what has really happened is lower fixed costs have made the news industry radically more competitive—meaning that information and discovery is now likely to be more like the restaurant industry in its level of speed and efficiency.
In fact, there is plenty of reason to think that the outlook for news is much better than the outlook for restaurants. News is far less regulated than restaurants; you can start doing serious journalism (however you wish to define it) from your house, on a WordPress blog, free of charge. But you cannot start a restaurant in your basement or your apartment—severe zoning restrictions reduce the ability of newcomers to disrupt the restaurant industry, and increase the fixed costs faced by all players within it. Even food trucks face licensing restrictions. Ease of entry means more room for trial and error—in other words, innovation.
Moreover, as the ecosystem of payment mechanisms has matured, news outlets have experimented more and more with new forms of price discrimination. Expensive wine in a restaurant is just one form of price discrimination—in the world of pure information, the opportunities for price discrimination are even greater.
I say all of this not as a great fan of the news—in fact, I loathe it, and actively desire its death. I think it is cognitively damaging, worse than useless, entertainment dressed up in a moral play. But the economics of the matter appear to me to be fairly straightforward. So long as there are consumers of news who desire it, it will continue to exist. Perhaps it will contract or perhaps it will grow; but I do not think it is going anywhere.