Last Tuesday, everyone’s favorite mad-scientist-laboratory of Democracy, the San Francisco City Council enacted a law banning the Happy Meal. Officially what is banned is the bundling of toys with fast food. The theory seems to be that toys are a cheap substitute for quality food and that a prohibition on bundling will force McDonald’s to compete instead on the quality of its food.
But it’s not easy to lay out a coherent theory of the Happy Meal. You could try a bargaining story. Kids like toys, parents want healthy food but are willing to compromise if the kids put up enough of a fuss. McDonald’s offers that compromise in the form of cheap toys and crappy food, raking in their deadweight loss (!).
You could try a story based on 2nd degree price discrimination. There are parents who care more about healthy food (Chicken Nuggets??) and parents who care less. A standard form of price discrimination has a higher end item for the first group and a low-end item for the second. The low-end item fetches a low price because it is purposefully inferior. But if toys are a perfect substitute for healthy food in the eyes of the health-indifferent parents, then a Happy Meal raises their willingness to pay without attracting the health-conscious (and toy-indifferent) parents.
You could even spin a story that suggests that the SF City Council’s plan may backfire. That’s what Josh Gans came up with in his post at the Harvard Business Review Blog.
For a parent, this market state of affairs spells opportunity. With McDonald’s offering a toy instead of additional bad stuff, the parent can ‘sell’ this option to their children and get them to eat less bad stuff than they would at another chain. The toy is a boon if the parents are more concerned about the bad stuff than having another junky toy in the house … They allow a parent to increase the value of healthier products in the eyes of children and negotiate a better price (perhaps in the form of better food at home) for allowing their children to have them. Happy Meals do have carrots after all.
But all of these stories have the same flaw: McDonald’s can still achieve exactly the same outcome by unbundling the Happy Meal, selling toys a’la carte alongside the Now-Only-Somewhat-Bemused Meals they used to share a cardboard box with. Just as before families will settle their bargains by re-assembling the bundle, health sub-conscious families will buy the low-end burger and pair it with toys, and parents who have to bribe their kids will buy McDonald’s exclusive movie-tie-in toys to get them to eat their carrots.
(Yes I am aware of the Adams-Yellen result that bundling can raise profits, but this has nothing to do with toys and healthy food specifically. Indeed McAfee, McMillan and Whinston show that generically the Adams-Yellen logic implies that some form of bunding is optimal. So this cannot be the relevant story for McDonalds which is otherwise a’la carte.)
So I don’t think that economic theory by itself has a lot to say about the consequences of the Exiled Meal. The one thing we can say is that McDonald’s doesn’t want to be forced to unbundle. Putting constraints like that on a monopolist can sometimes improve consumer welfare and sometimes reduce it. It all depends on whether you think McDonald’s increases its share of the surplus by lowering the total or raising it. The SF City Council, like most of us one way or the other, probably had formed an opinion on that question already.