Clawback: How Come Lobster Is So Cheap at the Dock and So Expensive on the Plate

It's Labor Day weekend, traditionally the end of summer's lazy days. Beach chairs are being thumped clear of sand and folded. Final tennis matches contested. Vacation homes are being boarded up and long commutes back to the city or suburb in hot, crowded cars are being endured with varying degrees of equanimity.

It also marks the end of certain seasonal gastronomic rituals: fresh corn, blueberries, soft ice cream and, the emblem of all that is sea-shore and summery, the last bite of lobster. The delicacy which can be had for $2 at the dock - and $40 on the plate.

Wherein lies a tale of economics that may help with the transition from idyllic revery to intensive scrutiny. As the following article explains, lobster is not just a seafood or even a edible commodity; it represents a certain lifestyle and mindset. It serves as a marker, like the buoys that show the way to treasured fishing grounds. Lobster's iconic socio and psychological value outweighs its cost, permitting merchants to mark it up in ways they wouldn't dream of attempting with other, more pedestrian, foodstuffs. It establishes the ceiling under which less august comestibles can be cooked and sold at a profit.

This is possible because of lobster's role (as opposed to roll...) in the commercial food chain. Its reputation as an occasionally affordable luxury and its brand, emblematic of all that is relaxed, fun and fattening, serve to support its primacy in the value chain long beyond that of its mere cost. JL

James Surowiecki comments in The New Yorker:

For more than a decade, we’ve been living through a commodity price boom. From oil to wheat and beef, the general rule has been that if you farmed it, caught it, or took it out of the ground you were probably going to make money selling it. But there has been a strange exception: lobster.

In 2005, Maine lobster was selling for almost six dollars a pound wholesale. By 2009, it cost just half that, and, in the past couple of summers, huge lobster harvests, believed by some to be a result of global warming, have glutted the market, sending prices tumbling further. This month, lobster off the boat is selling for as low as $2.20 a pound.

The impact of low-priced lobster is easy to see in the ports of Maine, where lobstermen are wondering how they can stay in business. And you can see it in supermarkets in the Northeast, where whole lobsters are often surprisingly cheap. Where you won’t find much evidence of a lobster glut, though, is in American restaurants. Even as the wholesale price of lobster has collapsed, restaurant prices for lobster tails and that hipster favorite the high-end lobster roll have stayed buoyant. There’s more lobster out there right now than anyone knows what to do with, but we’re still paying for it as if it were a rare delicacy.
Keeping prices high obviously lets restaurants earn more on each dish. But it may also mean that they get less business. So why aren’t we seeing markdowns? Some of the reasons are straightforward, like the inherent uncertainty of prices from year to year: if a bad harvest next summer sent prices soaring, restaurants might find it hard to sell expensive lobster to customers who’d got used to cheap lobster. But the deeper reason is that, economically speaking, lobster is less like a commodity than like a luxury good, which means that its price involves a host of odd psychological factors.
Lobster hasn’t always been a high-end product. In Colonial New England, it was a low-class food, in part because it was so abundant: servants, as a condition of their employment, insisted on not being fed lobster more than three times a week. In the nineteenth century, it became generally popular, but then, as overharvesting depleted supplies, it got to be associated with the wealthy (who could afford it). In the process, high prices became an important part of lobster’s image. And, as with many luxury goods, expense is closely linked to enjoyment. Studies have shown that people prefer inexpensive wines in blind taste tests, but that they actually get more pleasure from drinking wine they are told is expensive. If lobster were priced like chicken, we might enjoy it less.
Restaurants also worry about the message that discounting sends. Studies dating back to the nineteen-forties show that when people can’t objectively evaluate a product before they buy it (as is the case with a meal) they often assume a correlation between price and quality. Since most customers don’t know what’s been happening to the wholesale price of lobster, cutting the price could send the wrong signal: people might think your lobster is inferior to that of your competitors. A 1996 study found that restaurants wouldn’t place more orders with wholesalers even if lobster prices fell twenty-five per cent. As the study’s authors put it, “A low price creates suspicion.” This helps explain one of the interesting strategies that restaurants have adopted to take advantage of the lower price for lobster: they keep the price of lobster entrées high, but add lower-priced items—lobster bisque, lobster mac-and-cheese, a lobster B.L.T—to the menu. That way, they can generate more business without endangering lobster’s exclusive image.

Lobster has also stayed expensive because it makes other menu items, particularly seafood dishes, look more reasonably priced. A classic experiment described by Itamar Simonson and Amos Tversky showed that if you asked people to choose between a mid-priced microwave oven and a lower-priced one sales of the products were roughly split. But adding a higher-priced oven to the mix increased sales of the mid-priced product by forty per cent—the mere presence of a more expensive option made the moderate one look like a better buy. So any restaurant that cuts lobster prices significantly runs the risk of making that sesame-crusted tuna look too pricey.

Setting lobster prices is not, in other words, a matter of just adding a markup to costs. It’s a surprisingly complex attempt to both respond to and shape what customers want. The key, though, is that restaurants are able to adopt such strategies only because the restaurant business is not, at heart, a commodity market. Gas stations can try all sorts of approaches to bring customers in, but the retail price for gasoline rises and falls in line with supply costs, because gas is gas, and if you charge too much for it people will go to your competitor down the street. In the case of restaurants, there’s lots of competition, but there are few customers who are making decisions about where to go based solely on the price of lobster. And restaurants, obviously, can add value to the lobster they serve with unique recipes, décor, dockside location, and so on. They’re still in a very tough business, but at least they have some way of differentiating themselves, and some measure of pricing power. Commodity producers, by contrast, can make lots of money if the conditions are right, but their fate ultimately depends on the broader economy. Restaurants are trying to insulate themselves from the market; lobstermen are at the mercy of it.