Trendy Tables – Econlib

a report in the New Yorker (and discussed in a NPR marketplace segment) discusses table reservations in restaurants and shows how third-party sellers make money by reserving tables at popular restaurants and reselling them to eager diners. These “hustlers” and “mercenaries” as they are called (and call themselves) can be seen, even in themselves, as people pushing up the price on something that would otherwise be cheaper.

However, these are nimble entrepreneurs who provide an interesting example of how markets can emerge to solve complex coordination problems. Only restaurants in highly sought-after locations such as New York City have actually experienced a significant amount of such trading activity. Like the New Yorker article quotes about a particularly popular Italian spot: “New Yorkers risk their lives, begging, bribing and pleading to get a table at the Italian eatery.”

These restaurant tables are scarce commodities. If the prize is not used, ‘begging, bribing and pleading’ are ways in which competition for them will take place. The same applies when prices for other goods are controlled. Traders buy and sell reservations by monitoring reservation sites, reserving tables and posting them for sale on sites such as Trader appointment. By doing this, they increase the likelihood that the tables in these restaurants will be allocated to the most valued purposes, that is, to the guests who value them most. In other words, they are likely to increase efficiency.

Most seats in restaurants are not allocated based on the pricing mechanism, but on a first-come, first-served basis. Even when restaurants take reservations, they are usually first come, first served. A diner may not know about or decide to try a trendy new restaurant until the night before. In this scenario, without third-party sellers, they could wait for months to get a table reservation.

Third-party sellers have a seat available for them – for a price. In turn, the restaurant accommodates parties who most want to be there and who are likely to spend more on average. Third-party sellers are better off, as long as the money they make outweighs the time they spend trolling sites for reservation bookings.

There will probably be people who have it worse. Pareto improvements are difficult to achieve. Perhaps passers-by no longer have much of a chance to get a table that happens to be empty at the right time. If tables from third-party vendors don’t sell, restaurants may miss opportunities to seat needed customers. Some restaurants even choose not to list reservations online on platforms and instead use their own system. Overall, it is likely that overall prosperity will improve due to the existence of third-party sellers where reservations are consistently listed on online platforms.

An interesting question is why restaurants do not increase the price of tables and collect the extra surplus themselves. In the restaurant industry, products are vastly differentiated from company to company. Owners of popular restaurants could be said to possess a degree of monopoly power; they have a high demand for their product, but they can limit production because they are the only supplier of it. There’s only one place you can get a meal from Tatiana in New York. Monopoly power comes from the fact that no restaurant can perfectly copy what they have. If the wait for a table takes months, that implies that menu prices could be higher, or that the restaurant could use table prices to capture more of the monopoly revenue available to it.

Most restaurants that are successful and popular enough to have predictably full dining rooms every night are likely raising menu prices to some extent to meet increased demand, but it doesn’t seem to be enough to eliminate long wait lists. As a result of this fact, third-party sellers arise. The restaurant has left the monopoly rent on the table, so to speak, by not putting a price on reservations. This is because the costs are not feasible, or because there are compensating reasons not to do so. Perhaps the fame that comes with long wait lists and high prices for tables on third-party apps is a more valuable reputation for restaurants. Or perhaps it is more valuable for restaurant owners to have the certainty of a full dining room months in advance.

Finally, two diners who happen to get a table at the same time on a first-come, first-served basis are likely to place two different values ​​on getting that table. If the restaurant could give each of them a different allowance for the privilege of getting a table, it could make the extra surplus. This allows third-party sellers to take on the role of such price discrimination by allowing diners to compete in raising the price for the table. The restaurant industry is incredibly vibrant and it is interesting to explore why markets are emerging to address new issues within it.

Giorgio Castiglia is a program manager for the Project on Competition at the Mercatus Center and a PhD student in economics at George Mason University.