Living Economics

A la carte or Set Menu?
Mixed bundling, by offering a package deal as well as separately priced items, can be a revenue-maximizing pricing strategy in the face of varying customer needs.

I went to a Chinese restaurant in Tokyo in 1970 for a set lunch consisting of 3 courses. I liked the items very much. So I invited my American host and his wife for dinner in the same restaurant. I ordered the same lunch items a la carte. But the prices were so much higher that I almost fell out of my chair.

That set meals usually cost a lot less than the same items a la carte is familiar to all restaurant goers. The reasons are simple. First, the items are not exactly the same at least in portions and/or presentations. Second, the set meals are usually offered at a time when business is slower. Additional revenue over and above variable cost could help pay for the fixed cost. Third, set menus allow the kitchen to prepare the limited number of items in bulk thus saving preparation time. Fourth, the items offered could be bought cheaply in bulk or must be cleared out of the refrigerator before expiration. Fifth, the menu may include new promotion item that is not familiar to most customers. Sixth, the set menu is a promotion deal to attract customers to the more expensive a la carte meals.

The low prices of set meals usually come with strings: First, no substitution. Second, narrow service-time window. Set meals are still a good deal if ordering the package deal cost just a little more than what you have been prepared to pay for some of the desired items in the package. And if the desired items in the set menu vary from customers to customers, the set menu can capture enough customers to justify the package deal for the restaurant. And for those customers who need only one item out of the set menu, they could always order a la carte. The offer of both a set menu and a la carte selection is known as mixed bundling.

Mixed bundling is the common practice in most products except in cable TV. Except for a few movie channels which could be ordered a la carte, the basic cable package consists of 50 or 60 channels (WSJ). Not surprisingly, there is a heated debate on whether allowing viewers who watch an average of only 17 channels (Newsday 2/10/2006) to choose channels a la carte could reduce their subscription fees. Cable networks that sell only packages of channels to cable providers claim that channel bundling actually lowers subscription fees because a larger potential viewership commands higher offsetting advertising rates. But a new FCC study counter-claims that a la carte channel choice could lead to 3% - 13% rate reduction under some options (Newsday 2/10/2006). Only a market test allowing mixed bundling could prove which side is correct. It may be that only a few households would benefit from pure a la carte choice. Much more likely will be a two-part pricing system where every subscriber must pay a basic subscription fee for some common channels and a la carte fees for individual channels on top of the basic package. The basic subscription fee will cover the overhead cost and siphon off some of the consumer surplus arising from single pricing of individual a la carte channels.

  • WSJ. 12/8/2005. “Cable channels flinch at ‘a la carte’ proposal.
  • Newsday. 2/10/2006. “FCC hails a la carte cable TV.”
  • Newsday. 12/2/2005. “A la carte a good idea, Cablevision head says.”
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