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Sunday, October 19, 2008

The Economics of Oktoberfest

Does the contract between beer tent owners and servers provide the correct incentives?:

Oktoberfest Economics, by Ray Rees with research assistance from Andreas Moser, RES Newsletter: ...Oktoberfest ... is held mainly in September, with just a small overlap with October... Take a very large fairground, with the most technologically advanced and stomach-churning rides in the world, add to it 14 large beer tents, ranging in size from 3000 to 8000 places inside and 2-4,000 in the beer gardens outside, with then a myriad of smaller tents for more specialised eating and drinking opportunities and all kinds of stalls and sideshows, and you have the basic infrastructure. ... For the rest of the year, this large area of prime land in the centre of Munich, called by Münchners the Wies’n, is just a large car park, and so it has to earn its annual opportunity cost rate of return in just those 18 days. ...

The tents open at around 10 am. and fill up steadily through the day, often becoming completely full by 5 pm... One of the favourite postcard scenes from the Oktoberfest is of a ... waitress dressed in traditional costume and carrying an amazing number of foaming one-litre mugs of beer — often around ten — and still managing to smile. One of the most interesting things about the Oktoberfest, from an economist’s point of view, is the form of the contractual relationship she has with the owner/operator of the tent in which she works. She is employed just for the duration of the Oktoberfest, and has probably the most high-powered incentive contract you will find anywhere. She has no fixed wage, but receives 9 per cent of the revenue on the beer she ... brings to the table, as well as tips of course. Thus she has the incentive to maximise sales revenue as well as give good service.

This is not a trivial thing. She works more than a 12-hour day, and the fetching and carrying is very hard work, particularly when the tent becomes full and turns into an enormous disco... This usually happens from around 6 each evening. It is easy to see that a fixed wage unrelated to revenue would have very poor incentive properties. ...

The revenue-sharing form of contract means that the presumably risk-averse waitress receives no insurance, in the form of a fixed payment, from the tent owner, who is far richer and therefore likely to be less risk-averse, if not risk-neutral. This leads one to ask whether there may not be an alternative way of providing incentives. A noticeable feature of one of the large beer tents is the variation in waitress effort and rewards there must be across locations. Tables differ in their distance from the serving points and therefore in the work involved. Some areas fill up earlier than others, for example those closest to the bandstands, and therefore generate more revenue. In particular, there are areas of the tent reserved in ‘boxes’, which are booked by companies and groups, and these generate more tips than other areas, as well as higher value sales. So one could imagine a tent operator running an incentive system in the form of a tournament, in which high effort ... would be rewarded by allocating waitresses to the best groups of tables. In fact however this does not take place. Waitresses as a rule serve the same set of four tables in the same tent year after year, and moves between areas are infrequent.

The reason for this appears to be the importance of teamwork, as well as long-term customer relationships. Usually, a team of four waitresses work their set of four adjacent groups of four tables collectively, keeping the same team over a number of years. They share the fetching and carrying, which smoothes the burden of work and allows more regular individual rest periods, and they allocate arriving customers across tables, which effectively pools revenues. ... Moreover, customers form attachments to particular groups of waitresses and return year after year. A tournament system would disrupt these kinds of relationships, while of course they provide self-made insurance and incentive mechanisms.

The price of an Oktoberfest Mass, the litre mug of beer which is the standard unit of consumption, is regulated, and is set each year by a committee consisting of representatives of the tent operators and of the City Council. Its announcement is always followed by a storm of protest — the increases are usually above the rate of inflation. For waitresses, the crucial numbers are those after the decimal point. Apparently, customers almost always round up to the nearest Euro, so a price of €7.80 is bad news, €8.20 good. For a waitress serving around 1000 Mass per Oktoberfest, this would make a difference of about €600 in tips. On the other hand, since waitresses typically work over a long run of years, it all averages out in the end. There is no data enabling us to test whether the rate at which waitresses quit is sensitive to the price of a Mass. Love it or hate it, the Oktoberfest is a fascinating economic enterprise. It certainly gives economists plenty to talk about over our beer.

    Posted by on Sunday, October 19, 2008 at 01:23 AM in Economics | Permalink  TrackBack (0)  Comments (5)


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