Now that I am officially 21, I can freely discuss the topic of alcohol without fear of incriminating myself on the World Wide Web. In other countries, the legal drinking age is well below 21; in Norway, it is only 16! Both despite and because of the fact that high school and college students blatantly disregard the law, its existence plays a significant role in shaping the American drinking culture. While overseas, I was of legal age to witness and frequent alcohol venues, where I observed a unique business model in this industry.

In Israel, I discovered the concept of a bracelet bar. For a flat sum, one can receive an unlimited number of a specific alcoholic drink. For example, for the equivalent of $25, you could get refills of white wine all night long; for $35, unlimited beer; for $40, unlimited cocktails. The term bracelet bar originates from the bracelets one receives, which are different colors depending on the alcohol one orders.

Those who wish to get inebriated view this pricing strategy favorably. They intend to imbibe heavily, and buying a drink again and again quickly grows expensive. With no intention of capping their consumption, it is in their best interest to choose the option in which they pay a set amount. Interestingly, these expenses are reminiscent of those that a business incurs during the course of production. A fixed cost is one that is static; a variable cost fluctuates depending on the level of output. In this scenario, paying per drink is a variable cost, while paying a flat sum for unlimited drinks is a fixed cost.

On a microcosmic scale, by paying a fixed cost, at least if you plan on drinking a lot, you benefit from economies of scale. The single cost spreads thinner the more you order. Consequently, each individual unit becomes cheaper. What might sound like a hefty amount upfront, especially compared to the alternative of paying less for an individual drink, ultimately proves to be significantly cheaper.

This may be worthwhile for the alcohol happy college-aged tourist, but is it a sustainable business model? One important factor to consider is the profit margin of each drink sold. The profit margin is the ratio defined as (revenue-cost)/ revenue; the higher it is, the better. For institutions that sell alcohol (at least abroad), businesses benefit from a high profit margin. They buy their bottles in bulk, and then charge you a handsome sum per glass. When ordering per drink, you pay an inflated price that proportionately is far more than what the bar paid.

 

Technically, it is entirely possible that if every customer purchased a bracelet and drank ad nauseam (literally and figuratively), the store would lose money. The business can only survive if the value of the total number of drinks consumed does not exceed the sum that the customer paid upfront. I remember thinking the first time I was introduced to the concept of a bracelet bar that it would never last in America. For example, if it opened in a college town, it would go bankrupt within a week. Not only would it lose money with every customer, but it would also quickly run out of inventory. Guaranteed.

So how have the bracelet bars survived? A crucial element to implementing a particular business strategy is to be familiar with the local culture. Unlike Americans who consume obnoxious amounts of alcohol, Middle Easterners drink more moderately; the former revel in their bacchanalian state, while the latter unwind by sipping a spirit or two. Indeed, Americans’ utility, an economic term for satisfaction, is achieved through a higher drink consumption, and thus at a larger financial expense, than Israelis’. Since most of their customers in the Middle East do not drink nearly as much, bracelet bars in that region continue to turn a profit.

In America, we do not see bracelet bars, but we do see the concept of the “open bar.” Often, companies offer an open bar at events they host, in which attendees can order as many drinks as they wish, free of charge. Their motive for doing so is to entice people to attend, as well as to create an energetic ambience.

While psychology can explain the reason for its implementation, economics can describe the rationale for the ensuing behavior. It is not uncommon to see people gulp down far more than they normally would. That one party acts in its own best interests, even at the expense of another, is a concept referred to in economics as the principal-agent problem. In this situation, the host is the principal, and the agent-the one who makes the decisions- is the attendee.

Knowing that someone else is footing the bill, people drink as much as they want. Those who would normally order a glass or two will now drink much more. Their logic is that someone else is paying, so why not?

I witnessed this firsthand at my first 21+ event. Attendees consumed and reordered cocktails at a much faster rate than they would had they been paying. The result is ultimately an abnormally high expense, for which the host must pick up the tab.

Unsurprisingly, this problem frequently arises in the business world. Members of corporate executive boards are known to make purchases on the company account, even though this is not in the best interest of the shareholders, the official owners . Such behavior frequently makes headlines, as it is often intertwined with other illicit, illegal business activities, such as insider trading and corruption.

Being 21, I have virtually no restrictions in America, at least in terms of what I can do legally. The only downside is that now any tickets I buy will be under the adult category and therefore full price. Fortunately, I can still use my student ID to get a discount!