Thursday, August 28, 2008

The Economics of Drive-Throughs

A recent article in the Calgary Herald (“Customers are getting fed up over wait times at retail outlets”, August 27 2008) cited a new study finding evidence that "86% (of Canadian consumers) say that least once they have re-shelved their purchases or skipped the coffee and left the store" due to long lines.

Interestingly, the reporter interviewed a customer at Tim Horton’s. (For those not familiar with Tim Horton’s, it’s a very popular chain of Canadian coffee/donut shops. They are famous for something called a "double-double" which is a coffee with two creams and two sugars.) Being a non-Canadian, I find the Tim Horton’s phenomenon amazing: Aside from serving what I think is very bad coffee, every Tim Horton’s seems to have huge line of customers. In MacEwan Hall on the University of Calgary campus, there are at least three coffee places of which Tim Horton’s is the only one with a significant line (sometimes in excess of 25 people).

A new Tim Horton’s recently opened relatively close to my house. It is included with a Shell station and is about two blocks from another Tim Horton’s (located in an Esso station). What is amazing about the new Tim Horton’s (aside form the fact that people actually drink this coffee) is the lineup at the drive-through. My guess is that it averages six cars throughout the day and I’ve counted as many as 22 cars in the morning. This latter amount is so many that it blocks people from getting gas at the Shell station.

This leads me to wonder a bit about the environmental costs of drive-through services. Most of the cars in the lines are idling, which is probably the least efficient use of one's car. Moreover, most of the people in the drive-through are able-bodied and would be able to purchase their double-double from the line inside (where, incidentally, there are multiple servers as opposed to a single server at the drive through).

Due to these environmental costs, some communities have sought to regulate or even ban drive-throughs. I offer my $.02 on this issue: I think it would be wise for businesses offering drive-through services to include a surcharge for these services. Individuals using the drive-through are likely doing so as a matter of convenience and this convenience is something the company can charge for. By increasing costs the drive-through, firms will capitalize on this additional convenience they provide and increase the cost of idling your car in line. Essentially, this is a profit-maximizing way for firms to get individuals internalize the environmental externality they are imposing when waiting in line at the drive through.

Of course, there may be fairness issues regarding those individuals who use the drive-through because they are less mobile (e.g., the elderly, individuals with physical handicaps). I guess this is all simply food for thought (although I wouldn’t recommend Tim Horton’s donuts either).

4 comments:

Anonymous said...

SIR - I believe you would be forgetting the game theory aspect of charging a premium for drive-through service. If your local Tim Hortons started charging to use the drive-through, what would stop the average Tim Hortons goer from simply driving the two blocks over to get to the next coffee house that doesn't have a surcharge for drive-throughs?

Besides, drive-throughs provide a valuable service in harsh Calgary winters by preventing the coffee and the bearer from turning into the dreadful state of "being cold". As a Canadian my entire life, I suspect a ban on drive-throughs would be political suicide akin to when Mulroney introduced the GST and subsequently had his majority government reduced to two seats. What can I say? Canadians love their winters cold, their coffee hot, and sitting in drive-throughs.

Perhaps if you tried the Fruit Explosion Muffin, you would have a more favourable view of Tim Hortons's menu and business practices.

Anonymous Coward
Calgary

Aidan said...

Rob,
I don't see why firms would find it profitable to cause an environmental externality to be internalized, given that the externality is to the world generally and not specifically to the business.

I have a different theory on Tim Hortons. I agree that the coffee is worthless, by the way. I suspect that people don't mind the long lines (as much) because their choice of how to spend their time is being validated by others. The longer they have to wait, the stronger the proof of the coffee quality, and thus the greater the pleasure of consuming.

Businesses like Tim Hortons benefit from advertising that people are willing to wait to get their coffee. And so they wouldn't want to discourage idling motorists, who are free advertising.

If we are going to discourage car use, the best way is to think seriously about planning of new communities and public transit. (Though high gas prices don't hurt, either.)

rob said...

Just to clear things up, I think ALL Tim Horton's should charge for their drive-through services as a matter of corporate policy. On a personal, I just want to see fewer Tim Horton's. If one of 'em crashes due to my proposed policy, that's fewer cups of swill (and fewer emissions from the drive-through). One small step to alleviating climate change, one smaller step to eliminating the double double.

Ken said...

A couple of points on the drive-thru issue.

First to Rob’s initial point, Tim Horton’s charging a higher price for drive-thru in recognition of the added convenience for their customers would not be akin to internalizing the environmental externality. It would simply be charging for a private benefit. I do not see how, as Rob put it, it is “a profit maximizing way for firms to get individuals to internalize the environmental externality”. The externality exists because individuals idling in line impose costs on others that are not priced by the market. For example, high gasoline prices due to high oil prices don’t internalize the emissions externality from consuming gasoline (although they certainly, eventually, lower consumption). The social cost of consuming gas is still higher than the private cost even if the price is high because input costs are high. The same is true for drive-thrus. If Tim’s did charge higher prices for drive-thru to enhance their profits (charging for the convenience), this would not price the externality from idling in the drive-thru line.

An interesting question is, why doesn’t Tim’s (and other drive-thrus) charge higher prices for drive-thru already? If it would increase their profits I presume they would have figured this out. Aidan’s point about advertising via long lines may be one explanation. But none of this is relevant to the externality issue. If the government imposed a “drive-thru surcharge” that (properly) priced the environmental externality, this would be another matter. But even then we have some problems . . .

Second, and this is to Anonymous’ point, banning drive-thrus outright may not actually decrease overall emissions, as individuals may end up driving around looking for other alternatives (or perhaps better coffee), spend their time doing even more emissions intensive things, etc. As a more general point, selectively imposing higher costs on specific types of emission generating activities is neither efficient nor will it necessarily lead to a reduction in emissions overall. We have to take the general equilibrium implications into account.

We all know the most cost effective and efficient way to reduce emissions and internalize the emissions externality is with a broadly based system of carbon taxes and/or tradable permits; it is not to selectively impose effectively infinite taxes on particular activities by banning them outright, while leaving other emissions generating activities unpriced (or underpriced). Moreover, in an nth best world even if we restrict the number of instruments the government has available to it (and, for example, rule out levying a broad based carbon tax), the optimal drive-thru surcharge is not likely to be infinity, but equal to the marginal environmental damage (with an adjustment for the marginal cost of public funds due to the accompanying distortion in the labour market). Indeed, the charge should ideally be related to the amount of time actually spent idling (or, more accurately, to the actual emissions released by idling), as opposed to a flat fee or an ad valorem tax on drive-thru coffee. Which brings us back to a broadly based carbon tax . . .