Endless Crab Case Study

For those 2nd, 3rd, and additional helpings, what is the marginal cost to the customer (not the restaurant)?

The marginal cost to the customer for the additional helping depends on the marginal benefit. If the marginal benefit outweighs the marginal cost, the customer should have an additional helping, if not; the customer should stop and not have any more crab. The customer already paid the $22.99, so they will not have to pay any addition cost for consuming the 2nd and 3rd helpings.

What is the marginal benefit to the customer?

The marginal benefit to the customer is another plate of crab. The marginal benefit drops with each additional helping because the customer will get more and fuller. The sunk cost of $22.99 does not factor in this equation.

Contrast these costs/benefits to the marginal costs/benefits for the restaurants of additional helpings

The marginal cost to the restaurant is the dollar cost of the additional plate of crab (say the cost per pound), as well and the addition dollar cost that it takes to produce the crab for the customer and bring it to the table. In contrasting the marginal cost of the restaurant of that of the consumer, the consumer doesn’t incur any more costs for having more crab, only the restaurant does.

The marginal benefit to the restaurant is nothing; they are not making any more money off the customer for another plate of crab. By contrast, the customer receives more food until they have had enough.

How does the resulting consumer behavior impact Red Lobster?

If the price of Red Lobster’s endless crab goes up, the demand for the endless crab will go down because the consumer will look to replace the crab with the next best alternative. Red Lobster will lose those customers. The same will happen if Red Lobster eliminates the promotion.

Additionally, if Red Lobster continues to run the promotion at these prices, they will continue to lose money because the consumer is demanding that 3rd or even 4th plate which ends up...