Restaurant Reservations

Paul H. Rubin —  14 June 2014

Today’s New York Times has an interesting article on restaurant reservations (Julia Moskin, “Getting a Good Table by Flicking an App, Not Greasing a Palm,” Saturday, June 14, p. A1, As the title suggests, there are now various apps and online services that obtain hot restaurant reservations and then sell them to willing buyers. This process of course creates welfare gains for patrons who prefer paying to waiting in line (either physically or on endless telephone calls and redials). It can also create welfare gains for the restaurants themselves, both by reducing costly no-shows and sometimes by sharing in the revenue from the sale of the reservation. It is another example of the gains that can be realized by reducing transactions costs by using the internet and its progeny.
Let’s be clear about the gains. Reservations at a restaurant are worth more at some times of the week (Saturday night) than at other times (Wednesday noon.) Restaurants capitalize on some of these differences – cheaper lunch menus are standard. But in general restaurants have not charged more for Friday or Saturday nights than for other days, probably because of high transactions costs of such differential pricing. These new services allow differential pricing by day of the week and other factors leading to different demand. This differential pricing is in the form of a fixed charge for reservations. If part of the premium goes to the restaurant itself, then the restaurant can increase revenue without changing menu prices. Ultimately this will lead either to increased supply of high end restaurants or to reduced menu prices, or likely some combination. Diners will benefit from reduced prices or increased availability, and restaurants will gain as well. There is an efficiency gain from saving the time wasted by diners in waiting for seats or reservations. Part of the gains will go to those developing the apps, as a reward for their efforts.
What is also interesting about the article is the discussion of the “controversial” nature of these transactions. To an economist, anything that reduces transactions costs and allocates resources more efficiently to those willing to pay the most is efficient and so desirable. The developers of the apps seem to understand this. But to others, including many restaurateurs themselves, the system is immoral. One says “It’s online bribery.” Another, on learning that reservations are being sold online, says “Of course it bothers me.” Another “has crusaded against third-party reservation services.”
Much of my recent writing has been about the dislike of markets, including an article (Folk Economics), my Presidential Address to the Southern Economic Association, and a Wall Street Journal op-ed. In the case of reservation apps, the dislike probably comes from a variant of the zero-sum fallacy – the view that new institutions redistribute money and the ignoring of real benefits created for all parties. But it is particularly sad that even successful entrepreneurs – the founders and owners of successful restaurants –do not understand the benefits from efficient institutional arrangements.

 

Paul H. Rubin

Posts

PAUL H. RUBIN is Samuel Candler Dobbs Professor of Economics at Emory University in Atlanta and formerly editor in chief of Managerial and Decision Economics. He blogs at Truth on the Market. He was President of the Southern Economic Association in 2013. He is a Fellow of the Public Choice Society and is associated with the Technology Policy Institute, the American Enterprise Institute, and the Independent Institute. Dr. Rubin has been a Senior Economist at President Reagan's Council of Economic Advisers, Chief Economist at the U.S. Consumer Product Safety Commission, Director of Advertising Economics at the Federal Trade Commission, and vice-president of Glassman-Oliver Economic Consultants, Inc., a litigation consulting firm in Washington. He has taught economics at the University of Georgia, City University of New York, VPI, and George Washington University Law School. Dr. Rubin has written or edited eleven books, and published over two hundred and fifty articles and chapters on economics, law, regulation, and evolution in journals including the American Economic Review, Journal of Political Economy, Quarterly Journal of Economics, Journal of Legal Studies, and the Journal of Law and Economics, and he frequently contributes to the Wall Street Journal and other leading newspapers. His work has been cited in the professional literature over 8000 times. Books include Managing Business Transactions, Free Press, 1990, Tort Reform by Contract, AEI, 1993, Privacy and the Commercial Use of Personal Information, Kluwer, 2001, (with Thomas Lenard), Darwinian Politics: The Evolutionary Origin of Freedom, Rutgers University Press, 2002, and Economics, Law and Individual Rights, Routledge, 2008 (edited, with Hugo Mialon). He has consulted widely on litigation related matters and has been an adviser to the Congressional Budget Office on tort reform. He has addressed numerous business, professional, policy, government and academic audiences. Dr. Rubin received his B.A. from the University of Cincinnati in 1963 and his Ph.D. from Purdue University in 1970.

2 responses to Restaurant Reservations

  1. 
    Baron W. Cole 16 June 2014 at 3:50 pm

    Resistance to this practice may be rooted in perceptions of social class or rank. In other words, these tools enable those with greater means to buy their way to the head of the line. Now, we tolerate forms of this all the time, such as first class seating on airliners, and higher prices for the best seats at concerts, but for some, this may be one instance too many.

  2. 

    “To an economist, anything that reduces transactions costs and allocates resources more efficiently to those willing to pay the most is efficient and so desirable… In the case of reservation apps, the dislike probably comes from a variant of the zero-sum fallacy – the view that new institutions redistribute money and the ignoring of real benefits created for all parties.”

    This was the prompt, I think, to an identify-the-fallacy question on the LSAT a few years back.

    My kid’s 24 year old tutor explained the answer like this:

    Assuming that the first claim is true (which it isn’t) and that, in fact, menu prices will drop or more restaurants will open (which may not transpire),

    1) not everyone is an economist
    2) non-economists hold different beliefs about what is desirable
    3) some of these non-economists will oppose paying for reservations without being ignorant of the facts

    But I wouldn’t trust him — he got his JD via night school.