Sunday, July 23, 2006

Adverse Selection in the College Cafeteria

This week I’m serving as a faculty member at the Institute for Humane Studies’ Liberty & Current Issues Seminar, hosted by the Catholic University of America in Washington, D.C. As usual, both faculty and students are housed in the dorms and treated to college cafeteria food. These conditions are made tolerable by the great company and intellectual stimulation. (Seriously. I do at least one of these events every summer, and it’s always one of the highlights of my year.)

I bring up the cafeteria food not to complain, but because I realized today at lunch (while discussing the food with two student participants) that it could be a nice example of adverse selection.

Have you ever wondered why college meal plans are so expensive relative to the quality of fare? Most college meal plans are all-you-can-eat propositions. With extra servings free at the point of service, students tend to consume more food until the marginal benefit is zero (contributing to the well-known phenomenon of the freshman fifteen). The excess consumption explains part of the price; it’s crappy food, but you’re paying for quantity, not quality.

But there’s more to the story. Some students naturally eat more than others. Yet most college cafeterias set a uniform price for all students, and that price must cover at least the average cost per student in order for the cafeteria to break even. Then each student (and their parents) must decide whether to enroll in the meal plan at that price, and this is where the adverse selection sets in: Those who eat more than average are getting a good deal, so naturally they enroll. Those who eat less, however, are more inclined to drop the plan and get their food elsewhere. As a result, the meal plan disproportionately attracts the heavy eaters, so the average cost per enrolled student must rise… and the cafeteria has to hike its price accordingly. The higher price leads yet more of light-eaters to drop the plan, and so on.

There are ways of controlling the problem. One way is to offer different meal plans that limit the number of meals per week. These plans deal adequately with the difference between students who eat many meals and those who eat few, but not the difference between those who eat a lot per meal and those who eat a little. Another possible solution is to offer meal plans with different restrictions on the food quantities and types; this approach is akin to health insurance companies’ practice of offering a menu of differing insurance policies to their customers, so that consumers’ choices effectively sort them into differing groups. Yet another solution, adopted by some colleges, is simply to require enrollment in the meal plan by all students or, as is more typically the case, all freshmen. This approach holds down prices by preventing the defection of light eaters, but it also effects a cross-subsidy from the light eaters to the heavy eaters. In addition, this grants greater monopoly power to the cafeteria, which can push prices back up (unless the prices are regulated by the provider’s contract with the university) or quality down.

6 comments:

Yaron said...

There's another way of controlling the problem. Doing like any other place that sells food, and simply sell individual meals/dishes.
This is what happened, for example, at the university I've been to, where the cafeteria was operated by several different contractors.

Since paying for a meal is a very common concept, nobody is likely to complain, or even mind. The heavy eater can just buy another side-dish or a desert.
Just like anywhere else...

Jeff Brown said...

You're on, Yaron: I'm in exactly that pay-per-dish situation now, and I'm a heavy eater. Obviously it sucks. Interestingly, though, the individual dishes are still ridiculously expensive, and presumably there's no adverse selection problem.

I've discovered that if I ask them too, the food-dishers will give me more. Hardly anyone does that, though, so I don't think it's the reason the food's so expensive.

Anonymous said...

One piece of libertarian activism that I didn't do as an undergraduate counts among the few types of activism that I wanted to try but didn't: Cafeteria reform

Or, more precisely: cafeteria abolition.

We have specialized places that will serve you what to eat. They're called restaurants and grocery stores. They're really good at it; it's their core competency. (Hopefully the school's core competency is transmission of knowledge.)

Now let's say we take seriously the idea that Johnny will forget to eat if we don't introduce some measure of compulsion.

Even if there's a reason to mandate that Johnny Undergrad will eat, there's no discernible reason to mandate what he eats. And don't give me that public health crap: there's plenty of unhealthy food in most any caf.

So our solution should be: vouchers. Or, as they're usually called in this situation: a meal card. You have a bunch of money on the card. Maybe it can only be used at the wide variety of restaurants around campus, in order to prevent you from spending *all* of your money on hookers and booze.

Seriously, the inefficiency of the college caf system is pretty silly—until you realize that it's part of your sky-high tuition, at which point it becomes quite a bit less funny.

Glen Whitman said...

Yaron and Jeff -- yes, selling food the normal way (meal by meal or dish by dish) is obviously one option, but I presumed it was off the table for some reason. Also, note that the adverse selection problem I outline could afflict any all-you-can-eat form of dining, not just college cafeterias.

Yaron said...

The stated reason for having cafeterias in my university had nothing to do with thinking students will forgo eating (Though, to be honest, some of them did skip lunch a lot). It was to have somewhere with food which is close enough to the classrooms that it will be possible to eat without missing classes.
It makes sense. Sometimes the daily schedule is busy, and going out to a restaurant, even a nearby one, can take longer than the break. Especially on a large campus.

The university also dealt with several different contractors, so there was some competition forcing most of them to have more or less reasonable food and reasonable prices.

Plus, in a few places where prices were indeed too steep, there has been actions by the student body (amazingly enough this usually happened right before elections to the student's council) to try and boycott the place, thereby making them improve, and in one case even causing a change of contractor. Since these cafeterias cater only to students, it makes it a sort of an oligopsony. So you couldn't get really fancy food like in expensive restaurants, but overall you could get better/more food for the money you paid.

Glen, yes, that adverse selection would indeed affect every all-you-can-eat places. But I'm not sure it's the same problem conceptually, because these places pretty much begin assuming this condition, and the heavy eaters are the customers they target intentionally. So the issue of raising prices for the non-heavy eaters isn't relevant, these people will just eat in a different restaurant, what isn't available on some university/college cafeterias like in the model you described. People who see themselves as light eaters aren't in general attract to all-you-can-eat places anyhow.

Jeff Brown said...

I've been buying these little yoggurts at my dorm's cafeteria for $1.20. I just went to Meijer's (a local grocery store) and found them for $0.60. They were not on sale or anything.

I'm not making any point; I just think the numbers are interesting.