A report to New Yorker (also discussed in NPR Marketplace part) discusses restaurant table reservations, showing how third-party vendors make money by reserving tables at trendy restaurants and selling them to eager diners. These “hustlers” and “mercenaries” as they are called (and they call themselves) may be seen, even by themselves, as raising the price of something that would otherwise cost less.
However, these are cautious entrepreneurs who provide an interesting example of how markets can evolve to solve complex integration problems. Only restaurants in high-demand areas like New York City have experienced a significant amount of such commercial activity. As i New Yorker the article quotes about the most popular Italian restaurant, “New Yorkers risk their lives, beg, bribe, and plead for a table at an Italian restaurant.”
These dining room tables are a rare commodity. If value is not used, “begging, bribing, and persuading” are the means by which you will compete. The same is true when prices are controlled for other goods. Traders buy and sell bookings by monitoring booking sites, booking tables, and placing them for sale on sites such as A trader of choice. By doing this, they increase the chances that the tables in these restaurants are assigned to their most important use, that is to those who value them the most. In other words, they may be improving efficiency.
Most restaurant seats are not allocated by price, but on a first-come, first-served basis. Even when restaurants take reservations, those are also on a first-come, first-served basis. A diner may not know or decide to try a new trendy restaurant until the evening before. In this case, without third-party vendors, they can experience a wait of months to get a table reservation.
With third party vendors, there will be a seat available for them – for a price. In turn, the restaurant accommodates the groups that are most eager to be there and are likely to spend more money on average. Third party sellers are better as long as the money they earn is greater than the cost of the time they spend booking the sites.
There may be people in a worse situation. Pareto optimization is difficult to achieve. Maybe passers-by don’t have a chance to take an empty table at the right time. If tables listed by third-party vendors do not sell, restaurants may miss opportunities to accommodate needed customers. Of course, some restaurants choose not to list reservations through online platforms and use their own system instead. All in all, it is possible that overall well-being improves from the presence of third-party vendors when bookings are consistently listed on social media.
An interesting question is why restaurants don’t increase the number of tables and reap more profit themselves. In the restaurant industry, products are highly differentiated from one business to another. The owners of famous restaurants can be said to have only a certain power; they have a huge demand for their product, but they are able to limit their output because they are the only ones who can clean it. There is only one place to get food at Tatiana’s in New York. The dominance comes from the fact that no restaurant can completely copy what they have. If the wait for a table is months long, that means the menu prices can be higher, or the restaurant can use the table prices to profit from the tax available to them.
Most restaurants that are successful and popular enough to have predictably full dining rooms every night may raise menu prices to some degree to meet the high demand, but it doesn’t seem to be enough to clear long waiting lists. Third-party vendors emerged because 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 effective or because there are counter reasons not to do so. Perhaps the notoriety that comes with long waiting lists and high prices for tables in third-party apps is the most popular property of restaurants. Or perhaps having the assurance of a full dining room months in advance is more important to restaurant owners.
Finally, two diners who might get a table at the same time on a first-come, first-served basis may place two different prices on getting that table. If the restaurant can offer each of them a separate additional charge for the privilege of getting a table, they can earn more money. This leaves third-party sellers to fill the role of such price discrimination by allowing consumers to compete at the table price bidding. The restaurant industry is incredibly vibrant, and it’s interesting to explore why markets are evolving to address novel issues within it.
Giorgio Castiglia is the Manager of the Competitive Work Program at the Mercatus Center, and a PhD student in economics at George Mason University.
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