a Report New Yorker (And discussed NPR market segment) discusses restaurant table reservations and shows how third-party sellers make money by reserving tables at popular restaurants and then reselling them to eager customers. These “hustlers” and “mercenaries” as they call themselves, may appear to themselves as inflating prices for what would otherwise be cheaper deals.
But these are agile entrepreneurs, and they provide an intriguing example of how markets can emerge to solve complex coordination problems. Only restaurants in high-demand locations, like New York City, actually experience any significant amount of such transactional activity. New Yorker Referring to a particularly popular Italian restaurant, the article quoted, “New Yorkers risking their lives, begging, bribing and pleading to get a seat at an Italian restaurant.”
Tables at these restaurants are a scarce commodity. When price is not used, begging, bribery and pleading are the means by which people compete for tables, as well as when the prices of other goods are controlled. Traders buy and sell reservations by monitoring booking sites, reserving tables and selling them on sites such as: Appointment TraderThis increases the likelihood that a restaurant table will be allocated to its most valuable use – to the customers who value it most. In other words, it’s considered more efficient.
Seats at most restaurants are assigned on a first-come, first-served basis, rather than based on a fee structure. Even if a restaurant accepts reservations, it is usually on a first-come, first-served basis. Diners may not know about or decide to try a trendy new restaurant until the night before. In these situations, without a third-party distributor, you could end up waiting months to get a table reservation.
Third-party sellers pay a fee to guarantee a seat, and in return, restaurants offer it to the group that is most eager to go – the group that is, on average, more likely to spend more. Third-party sellers also benefit as long as the money they make by crawling booking sites exceeds the time costs they spend to process reservations.
Some people may be worse off. Pareto improvements are difficult. Passersby probably no longer have much of a chance to sit at an available table at the right time. If tables posted by third-party sellers go unsold, restaurants may miss opportunities to seat needed customers. In fact, some restaurants do not post reservations on online platforms, instead using their own systems. Overall, the presence of third-party sellers to ensure that reservations are consistently posted on online platforms is likely to improve overall welfare.
An interesting question is why restaurants don’t raise table fees and make the extra money themselves. In the restaurant industry, products are highly differentiated across industries. Popular restaurant owners may be said to have a degree of monopoly power. They have a high demand for their product, but because they offer it exclusively, they can limit production. Only Tatiana can dine in New York. Monopoly power comes from the fact that no restaurant can copy their product exactly. If wait times for a table are months long, it means that menu prices can be higher or the restaurant can use table pricing to capture more monopoly rent.
Most restaurants that are successful and popular enough to expect a full house every night are likely to increase their menu prices to some extent to keep up with increased demand. requestBut it doesn’t seem to be enough to eliminate long waiting lists. A consequence of this fact is that third-party sellers are born. Restaurants have, so to speak, given up their monopoly rent by not putting a price on reservations, either because it is not cost-feasible or because they have conflicting reasons not to do so. Perhaps the notoriety that comes with long waiting lists and high prices for tables on third-party apps is a more valuable reputational asset for restaurants. Or maybe the certainty of a dining room being full months in advance is more valuable to restaurant owners.
Finally, two diners seated on a first-come, first-served basis are likely to place different values on that seat. A restaurant can make a surplus if they are willing to pay different extra prices for the privilege of sitting. This allows third-party sellers to act as such price discriminators by allowing diners to bid on the price of a seat. The restaurant industry is incredibly dynamic, and it’s interesting to explore why markets are emerging to address new problems within it.
Giorgio Castiglia is program manager of the Competition Project at the Marketas Center and a doctoral student in economics at George Mason University.
