Why are Peanuts free but not water at many bars?


Some bars charge customers as high as $4 for a 500ml bottle of water, while making sure that the bowl of salted peanuts stay full and within reach all the time. A valid question is, shouldn't it be the other way around, since Peanuts are more expensive to produce than water? How do we explain this common phenomenon?

Easiest way to understand this is to look at the relationship of water and peanuts to the demand of the primary product, which in this case is the alcoholic beverage, that the bar sells. Nuts and alcohol are complements, thus an increase in the consumption of the (free) peanuts would induce a higher demand for the alcoholic beverage. Since salted nuts are relatively cheap, and drinks have a high profit margin, the bar has a stronger incentive to give away the nuts freely to increase its profits.

In contrast, water, coke or any other non-alcoholic drink are substitutes. The more water the customer drinks, the fewer alcoholic beverage he will consume. Thus, the bar has a stronger incentive to set a high price, thus discouraging their consumption.

 It isn't a surprise that non-drinkers feel cheated when they accompany their friends to bars. So the next time when your glass of Coke Zero costs $6 and a cocktail of Bloody Mary costs $10, remember, it's not just the bar's fault. Do blame the Demand-Supply forces and the law of Complements and Substitutes. Happy pubbing!