Economists say there is no such thing as a free lunch. Unless you live in Clayton, Missouri (a high-income suburb of St. Louis). A new Panera location there is trying out a new business model. It offers the same menu as its other locations across the country (with prices shown on the menu), but consumers pay whatever they feel like paying. This is what we call first-degree price discrimination, or personal pricing. Ideally, the company has individuals pay as much as they are willing to pay but there is no way of enforcing that here. Peer pressure will likely do that, but there is no guarantee.

As the article mentions, there are two very different groups of customers that would potentially visit the location: 

The clientele at the Clayton location is a mix of well-to-do attorneys and bankers from Clayton, as well as lower-income customers who work nearby or are visiting the sprawling St. Louis County offices and courthouse nearby. Miller, the cashier, said most customers paid full price for their meals Monday, but some took a discount of a few dollars, or paid half-price.

In order for price discrimination to work, there have to be different types of customers, and that’s definitely the case here. The main question is whether the increased volume of sales by lower-income customers will more than make up for the decrease in profit margins on those sales. Another question is how many of the well-to-do customers will actually pay more than the listed menu price. The data on this experiment would be incredible; I might have to make a phone call here. 

There is one more wrinkle to this story though. This Panera location is separate from the national chain. Listed as a non-profit, it does not have to pay taxes. Instead of paying for the food, customers provide “donations.” Customers save on sales taxes, the company does not have to pay taxes on its profits nor sales taxes on the supplies it purchases.

So why do it? Maybe it’s a public relations gimmick for the main company. Maybe the profits earned by this company can be used to fund the charitable contributions that Panera would normally do, so their profits from the for-profit branches of the chain can be used in other ways. Maybe they want to see if it would work in their for-profit chains. Either way, it’s an interesting experiment.

*Yes, I know it’s not a free lunch. Somebody’s paying for the lunch — whether it’s the high-income customers subsidizing the low-income customers, or the taxpayers subsidizing them by not collecting tax revenues. What can I say? I had trouble thinking of a catchy title to this post.

UPDATE: I’ve sent them an e-mail asking them if there is any way of acquiring their data. Based on past experience, I’m not optimistic, but sometimes people surprise you.