A report in the New Yorker (and discussed in an NPR Marketplace segment) discusses restaurant table reservations, showing how third-party sellers are earning money by reserving tables at trending restaurants and reselling them to eager diners. These “hustlers” and “mercenaries” as they have been named (and self-named) might be seen, even by themselves, as jacking up the price for something that would be cheaper otherwise.
However, these are alert entrepreneurs who provide an interesting example of how markets can emerge to solve complex coordination problems. Only restaurants in very high-demand locations like New York City have actually experienced a significant amount of such trading activity. As the New Yorker article quotes about one particularly popular Italian spot, “New Yorkers are risking their lives, begging, bribing, and pleading to get a table at the Italian eatery.”
These restaurant tables are scarce commodities. When price is not used, “begging, bribing, and pleading” are ways that the competition for them will take place. The same is true when prices are controlled for other goods. Traders buy and sell reservations by monitoring reservation sites, booking tables, and placing them up for sale on sites like Appointment Trader. By doing this, they increase the likelihood that the tables at these restaurants are allocated to their most valued uses, i.e. to the diners that value them the most. In other words, they likely are enhancing efficiency.
Most restaurant seating is not allocated by the price mechanism, but on a first-come first-served basis. Even when restaurants take reservations, those are also typically first-come first-served. A diner may not know about or decide to try a trendy new restaurant until the evening prior. In this scenario, without third-party sellers, they might find a months-long wait to get a table reservation.
With third-party sellers, there will be a seat available for them – for a price. In turn, the restaurant seats parties most eager to be there and are likely to spend more on average. Third-party sellers are better off as well as long as the money they earn is greater than the cost of the time they use to troll sites for reservation bookings.
There are likely to be people who are worse off. Pareto improvements are difficult to come by. Perhaps passers-by no longer have much of a chance to grab a table that just happens to be empty at the right moment. If tables listed by third-party sellers don’t sell, restaurants may miss opportunities to seat needed customers. Indeed, some restaurants opt not to list reservations with platforms online and use their own system instead. Overall, it is likely the case that total welfare improves from the existence of third-party sellers where reservations are consistently listed on online platforms.
An interesting question is why restaurants don’t raise the price of tables and reap the extra surplus themselves. In the restaurant industry, products are hugely differentiated from one business to the next. Owners of popular restaurants might be said to have a degree of monopoly power; they have high demand for their product, but they are able to restrict output because they are the sole purveyor of it. There is only one place to get a meal at Tatiana in New York. The monopoly power comes from the fact that that no restaurant can perfectly copy what they have. If the wait for a table is months long, that implies that menu prices could be higher, or that the restaurant could use table-pricing to reap more of the monopoly rents that is available to it.
Most restaurants that are successful and popular enough to have predictably full dining rooms every night likely raise menu prices to some degree to accommodate the higher demand, but it would seem not enough to clear the long wait lists. Third-party sellers arise as a result of this fact. The restaurant has left monopoly rents on the table, so to speak, by not putting a price on reservations. This is either because it is not cost-feasible or because there are countervailing reasons for not doing 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 perhaps having the certainty of a full dining room months in advance is more valuable to restaurant owners.
Lastly, two diners who happen to get a table at the same time through first-come first-served seating are likely to place two different values on getting that table. If the restaurant could give each of them a different surcharge for the privilege of getting a table, it could gain the extra surplus. This leaves third-party sellers to fill the role of such price-discrimination by allowing diners to compete in bidding up the price for the table. The restaurant industry is incredibly vibrant, and it is interesting to explore why markets are emerging to address novel issues within it.
Giorgio Castiglia is the Program Manager for the Project on Competition at the Mercatus Center, and a PhD student in economics at George Mason University.
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