At some restaurants (like Qdoba), a side of guacamole is included in the price of your burrito, while at other places (Chipotle), the guac is extra. Not surprisingly, the cost of a burrito is about $1 more at Qdoba than at Chipotle, but at the same time, a side of guac at Chipotle costs $1.80. (Check out this Quora on Chipotle’s arguably abusive guacamole pricing policy.) So, from a business or economic perspective, which pricing policy is the optimal one?
Bonus questions: Why doesn’t Chipotle charge extra for other sides like salsa or sour cream? Also, how “elastic” is the demand for guacamole, and why might the price elasticity of guac explain Chipotle’s pricing policy?
Update (1/28): Our friend and colleague Jonathan Kariv responds as follows: “My first thought (which could well be obviously wrong to people who’ve thought harder about this than I have) is that maybe it’s beneficial to both Chipotle and Qdoba to have different pricing models. Perhaps if they do the same thing, then they’re competing more directly, but if they do different things, then they both get to dominate a different section of the market. This might be extendable to the bonus question of other add ons. Maybe they’re just adapting to the other guys strategy.”