Happy Hours excite most. While the idea of getting a free cosmopolitan would be at the core of the excitement for the multitude, economists like the concept of happy hours for an entirely different reason. The reason being the defiance of the classical model of economics. On a classical model, an increase in demand leads to an increase in price. What then explains the discounts and deals that bars offer during happy hour? Not a competitive market system, but rather a monopolistic system.
For most bars, the actual hours corresponding to the happy hours, are the ones just before or right after prime dinner hours, which is because these bars are targeting the large mass of youngsters and office workers. Happy hours in the early evening hours will have a lot of deals available on cheap alcoholic beverages that are preferred by youngsters, like beer. The deals dont offer any relaxation on the actual price of the beverage but rather, the quantity that one can buy for a certain price is increased. The late evening or post-dinner ones are meant for office workers.
In normal circumstances, bars exercise monopoly power based on convenience. By creating the so-called Happy Hour, the bar creates a small local monopoly depending on the distance that people want to travel. Every consumer undergoes travelling and search costs. When restaurants lower the costs of drinks, each additional rupee of total cost is more obvious to the consumer. Let us assume that a drink is for ten rupees at a normal hour and the travelling expense is one rupee. This is less noticeable than a drink for five rupees and a travelling expense of one rupee. By lowering the costs of drinks, businesses are more likely to increase demand of office workers based on location. People are going to buy more alcohol and so the relative price becomes more important and thus people are not very willing to travel to take advantage of lower prices, making the nearest bar an abstract monopoly. Happy hour creates a season of high and low demand (happy hour and non-happy hour) and due to these quick changes, firms are not able to enter the market to change the supply- creating a monopoly over supply. During normal hours, because people are willing to travel more, the monopoly power that was supported by travel costs is partially dissolved.
Even in cases when people dont consume excessive amounts of alcohol, the profit mechanism depends on some other basic network externalities in play at happy hour, so that demand elasticity increases as price falls. More people are going out, even though every person is willing to consume the same amount of alcohol as usual. This increase in people has a further effect of drawing still more people to the bar to take advantage of the social atmosphere. Thus, during happy hour, the lower parts of the demand curve become more price elastic. Under normal hours of operation, giving a happy hour discount would not incentivize so many people to come in, because only the first group (the group that comes in response to the price effect only) would come in, but the people who come for the social atmosphere would not.
There are many ways of looking at the economics behind happy hours. Some might say that it is very easy for any firm to enter and exit the happy hour market, making bars competitive rather than monopolistic. The fact that most (i.e. many) bars and restaurant-like establishments have their own happy hour does not mean that a happy hour is exclusive to one or the other establishment, which would mean that it is not a monopoly. This would make the entire system an oligopoly. In such a circumstance, the externalities would play a bigger role in the amount of profit that is made by a bar. But do you think the restaurant owners think of this stuff when deciding whether to do a happy hour? I would be interested in hearing from them.
Meghna Yadav
Shri Ram College of Commerce