How to satisfy an increasing demand for a good with a fixed supply: the case of a chain gourmet restaurant
"Will too many chefs spoil the broth?" U.S. News & World Report, September 4, 2000
Ordinarily, an increase in demand raises prices, which, in turn, encourages more supply, and this, in turn, brings the price to its equilibrium level (i.e., the price at which demand and supply are exactly equal) in the long run. However, if a supply does not respond to a higher price, then a larger demand simply increases the price paid by consumers. If a supply is absolutely limited, such as land, which human beings cannot manufacture although they can transform it to a certain extent, then the high, often exorbitant, price of the good is referred to as rent. In other words, rent is a premium we pay for a fixed supply of a good. A monopoly, being the sole supplier, often earns this rent by limiting the supply of its product. In fact, very famous athletes or entertainers earn rent, called quasi-rent, because of their extreme rareness. For example, the majority of Tiger Woods' annual income should be treated as quasi-rent.
Gourmet restaurants are not an extreme rarity in America, and there is a certain amount of competition among them. Yet recently, baby boomers with highly sophisticated palates and high incomes significantly increased demand for gourmet restaurants. More importantly, the boomers developed strong preferences for specific individual restaurants. When these high income consumers are frequently away on business, they really miss their favorite gourmet restaurants in their home towns.
To satisfy the increasing demand for gourmet restaurants in locations far from their original locations, many gourmet restaurants have now established franchises throughout the United States. For example, Charlestown, Massachusetts-based Olive's restaurant, whose owner-chef frequently appears on Public Television, set up eleven new branch restaurants. The chef checks on each branch restaurant through a high tech, multidirectional zoom lens camera. He can see every dish prepared at each of his restaurants. Another gourmet restaurant chain, Commander's Palace, requires that a family member be on duty at each of its branch restaurants. Famous French-Thai restaurant Vong in New York has branch restaurants in Chicago, London, and Hong Kong. Each day, the chef in New York faxes detailed diagrams of the day's menu to its branch restaurants.
In the case of gourmet restaurants, the limited supply of talented chefs can be resolved by utilizing high tech monitoring devices or faxes.