Applying Economics To Pubs

As I was standing in the queue to pay a rip off price for a pint to use as mixer for the naggin of whiskey in my coat pocket, I wondered how I could apply my knowledge of economics to the situation. Ireland is well known for its links to alcohol and as a student drinking is almost mandatory for me. So what is the economics of drinking?

The pub industry has the strange characteristic of simultaneously being an industry dominated by competition and one that is pretty much an oligopoly. Ireland has an enormous number of pubs, there is one in every parish and (it seems) at every crossroad. Not far from where I live is the town of Athenry where nearly half the buildings are pubs. There is even one street that is comprised almost entirely of pubs. I live in the country where there is only a scattering of houses, but you can head in any direction and meet a pub within 5-10 miles. Surely people have a wealth of choice?

Despite the huge numbers of pubs, few of them actually compete. Most country pubs have their “regulars” who always visit no matter what as it is their “local”. The large number of pubs are quite dispersed, so that each pub has a monopoly on its local parish. So if you’re drinking in Carnmore you go to Grealish’s because it is the only pub. You could go to a neighbouring village, but people can be fiercely parochial and support their village and local like people support a sports team. You stick with it through and through. There is also the problem that it is difficult to travel far when you have drunk alcohol. Buses are also rare in the countryside and don’t run late. The huge number of pubs has done little to push down the price of alcohol in pubs, universally recognised as being too high and regularly undercut by supermarkets.

Pubs could be thought of as mini-monopolies in that they have complete control over the premises. They do everything they can to restrict people moving drink from elsewhere. Bouncers at the door block people from bringing drink in with them and may block you if you try to go to another pub and come back again. Pubs are also mainly social areas so you go where everyone else goes. Even if you hate the pub you go anyways because it’s better than going to a place full of strangers. Even people who don’t drink go to pubs. People rarely switch pubs (especially in the country) out of habit or fashion. There is also the problem of overchoice and the network effect. Everyone goes to the “cool” pub and no one goes to the “old man’s pub” so you go to the cool pub if you want to see your friends. From personal experience what makes a good night out is not where you are as much as who you are with. This does mean you end up in a lot of terrible pubs with your friends.

The main problem with pubs is that they are so expensive. With pints costing €5, people instead drink elsewhere. This has given rise to the process of “pre-drinking” where people buy cheap drink in the supermarkets (where you can get a can for €1) and drink at home before going into a pub or club. Or people buy cheap drink and try to sneak it into a pub without getting caught. So they try to get the benefit of a warm, cosy pub with a good atmosphere, without paying for it. This is the economic problem known as free riding, which is not to be confused with the free riding that goes on in the pubs toilets.

There are significant externalities in pubs. You see, pubs make their money by turning people into social nuisances and damaging their health. Drunken people are more likely to start fights and damage things. So once they are too drunk they are kicked out of the pubs. But this doesn’t solve the problem; it simply moves it off the premises of the pub. So pubs increase the level of violence and fighting but bear none of the costs. Drunk people are a social nuisance (I’ve been drunk enough to know I am), vomiting, urinating, stealing and vandalising the surrounding areas. This says nothing of the large number of murders, assaults, domestic violence cases and traffic deaths in which alcohol was a large influence. So pubs essentially gain at the expense of the rest of the community.

There is also the health cost of alcohol. It is estimated that alcohol costs Ireland €3.7 billion (or 2% of GDP) every year. It causes severe damage to people’s health, particularly their liver. So pubs gain at individual’s expense. Again the pub gains a benefit from alcohol (money) while the cost is pushed onto the consumer (poor health). While it is true that no one is forcing people to drink, this argument is also used by drug dealers.

Actually could you argue that people are forced by social norms, peer pressure and culture to drink? I know two brothers, one of whom drinks very little and doesn’t often go to pubs or clubs. He has a reputation for being a “dry shite” or boring, dull, lazy and no fun. Whereas the other brother drinks a lot and gets drunk. He is considered funny, good to hang around with and generally a fun guy. There is huge pressure on people (particularly in Ireland) to drink and those (few) who don’t can feel excluded. So can we really say drinking is a free choice?

There is also the point that alcohol is an addictive drug. Alcoholism is a serious (though rarely discussed) problem. Where does alcoholism fit with the theory that consumers are rational utility maximisers? Economics is based on the idea that consumers know what is best for themselves and always choose this. But many people are addicted to alcohol and drink even though they know it’s bad for them.

(This isn’t an argument for prohibition or limiting alcohol sales. I enjoy drinking and wouldn’t like to see it go. But I do realise that drinking is quite daft and illogical.)

How can drunk people be claimed to be rational? Often people drink too much and throw up everywhere, which can hardly be called utility maximising. A night out is a time of bad choices and terrible decisions. Everyone has numerous stories of things that seemed great at the time but were actually atrocious decisions. The morning after is often a time of regret where we remember how much money we wasted at the bar. Drunk people are not rational.

So how can the market for a mood altering, addictive drug sold in pubs marked by a lack of competition and irrational, illogical and incoherent consumers be described as efficient? I haven’t a clue.

9 thoughts on “Applying Economics To Pubs”

  1. Worth mentioning that about 30% of the price of a pint is excise and VAT.

    “Economics is based on the idea that consumers know what is best for themselves and always choose this. But many people are addicted to alcohol and drink even though they know it’s bad for them.” — you are talking about false economics, not true economics…

  2. I’m having trouble finding the article, but there seems to be a pretty strong psychological case for arguing that people, particularly with regards to alcohol, are in fact not rational in a way we want them to be. Neuroscientists found out that when thinking about yourself in the future a different part of the brain is active compared to when you think of yourself in the present. Interestingly enough, the part of the brain that activates when you imagine yourself in the future is the part of your brain that is also used to think of other people. Thus, when thinking of how terrible you’re going to feel tomorrow with that hangover, you are not intertemporally maximizing your utility and simply saying “I don’t care as much” – you are actively trying to maximize “someone else’s” utility you don’t actually care about much at all. That’s “tomorrow’s me” problem, not mine.

  3. It was an interesting post especially the story two brothers, one of whom drinks very little and doesn’t often go to pubs or clubs which indicate alcohol is a part of culture, business and social interaction between popular group and non-popular group (especially young people).

    In Asian, alcohol always link with other related trade such prostitution, triad’s control business, gambling which also contribution increase of bribery. Even, the total blame are not to alcohol, there was a connection that linked all this together.

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