A report in the New Yorker (and discussed in a NPR Walk segment) deals with restaurant table reservations, showing how third-party vendors make money by reserving tables at trendy restaurants and reselling them to eager diners. These “scammers” and “mercenaries,” as they are called (and as they call themselves), can be seen, even by themselves, as jacking up the price of something that would otherwise be cheaper.
But these are savvy entrepreneurs who provide an interesting example of how markets can emerge to solve complex coordination problems. Only restaurants in high-demand locations like New York have actually seen such significant business activity. New Yorker The article quotes one particularly popular Italian restaurant: “New Yorkers risk their lives, beg, bribe and plead to get a table at this Italian restaurant.”
These restaurant tables are scarce commodities. When price is not used, “begging, bribery and supplication” are ways in which competition for them will be felt. The same is true when prices are controlled for other goods. Merchants buy and sell reservations by monitoring reservation sites, reserving tables and listing them for sale on sites like Trader Appointment. By doing so, they increase the likelihood that tables in these restaurants will be allocated to their most valuable uses, that is, to the diners who value them most. In other words, they are probably improving efficiency.
Most restaurant seating is not allocated based on the price mechanism, but on a first-come, first-served basis. Even when restaurants do take reservations, they are usually granted on a first-come, first-served basis. A customer may not be aware of a trendy new restaurant or may decide to try it only the night before. In this scenario, without third-party vendors, they could have to wait months to get a reservation.
With third-party sellers, there will be a seat available for them – for a price. In return, the restaurant gets the people who are most eager to be there and who are likely to spend more on average. Third-party sellers also do better as long as the money they make is more than the time they spend trolling sites for reservations.
There are probably people who are in a worse situation. Pareto improvements are hard to come by. Perhaps passersby are no longer very likely to grab a table that happens to be empty at the right time. If tables offered by third-party vendors do not sell, restaurants may miss opportunities to accommodate the customers they need. Indeed, some restaurants choose not to list reservations on online platforms and use their own system instead. Overall, it is likely that total welfare improves due to the existence of third-party vendors where reservations are regularly listed on online platforms.
It is interesting to ask why restaurants do not raise table prices and collect the surplus themselves. In the restaurant business, products are very different from one firm to another. One could say that the owners of popular restaurants have a certain monopoly power: they have a high demand for their product, but they are able to limit production because they are the only suppliers. There is only one place to eat at Tatiana’s in New York. Monopoly power comes from the fact that no restaurant can perfectly copy what they have. If the wait for a table is months long, this implies that menu prices could be higher, or that the restaurant could use table prices to collect more of the monopoly rents it has.
Most restaurants that are successful and popular enough to have full dining rooms every night probably raise menu prices to some extent to accommodate the rising drink prices. requestBut that doesn’t seem to be enough to eliminate long wait lists. Third-party vendors are the consequence. The restaurant has left monopoly rents on the table, so to speak, by not pricing reservations. That’s either because it’s not profitable, or because there are countervailing reasons not to. Maybe the notoriety that comes with long wait lists and high table prices on third-party apps is a more valuable reputation asset for restaurants. Or maybe the certainty of having a full dining room months in advance is more valuable to restaurant owners.
Finally, two diners who obtain a table at the same time on a first-come, first-served basis are likely to assign two different values to obtaining that table. If the restaurant could give each of them a different premium for the privilege of obtaining a table, it could extract an additional surplus. This leaves third-party vendors with the role of price discriminating by allowing diners to compete to drive up the price of the table. The restaurant industry is incredibly dynamic, and it is interesting to explore why markets emerge to address new problems.
Giorgio Castiglia is the director of the Competition Program at the Mercatus Center and a doctoral candidate in economics at George Mason University.
