[garrettdc]

Price elasticity of demand IIRC.

Demand functions aren't generally straight like the illustrative graphs used in intro classes. What you end up with is easy replacement with similar goods. Being able to differentiate goods in food-service seems like a very difficult proposition without some sort of brand recognition. Because of that, if someone can purchase some food that is equal or close enough to equal at a significant (significance as defined by the consumer utility) then they will go with the cheaper option.

While raising prices seems like the simple solution to this issue, the reality is likely that they would quickly - if not immediately - price themselves out of the market.

[mauvehaus]

Supply and demand curve apply to labor too though, right? At some point (in the near future if the premise of the article holds), the labor won't be available at the current price. Restaurants that won't raise wages won't be able to offer good service to their customers, and ones that do raise wages will be able to offer good service. The competing classes of restaurants are no longer substitute goods.

(Not an economist, for the benefit of anybody who doesn't find that patently obvious ;-)

ETA: I don't see the reason for the downvotes on the parent. It seems like a pretty reasonable explanation as to why there would be a brutal race to the bottom in restaurant industry. But again, my economics background is limited. Maybe somebody could explain the flaw in the argument?

[hkarthik]

It feels like a straw man argument. Food is a basic necessity, and there is a threshold where you grumble but still open your wallet to pay up, rather than walk away. Overtime you get de-sensitized to the higher price and the fact that the everything on the dollar menu actually cost $1.29 doesn't phase you.

I think the restaurant industry should look more holistically at options for dynamic pricing ala Uber. These could increase their margins enough to actually address the labor costs more effectively.

[CocaKoala]

Well, food is a basic necessity but restaurants aren't. Prices going up at a restaurant doesn't necessarily mean that the local Safeway needs to raise their prices as well.