Paper (PDF 291 K / 33 pages)
Lariviere and Alexei Alexandrov
We examine the role of reservations in capacity-constrained services with a focus on restaurants. Although customer value reservations, restaurants typically neither charge for them or impose penalties for failing to honor them. However, reservations impose costs on firms offering them. We highlight ways in which reservations can increase a firm's sales by altering customer behavior. First, when demand is uncertain, reservations induce more customers to patronize the restaurant on slow nights. The firm must then trade off higher sales in a soft market with sales lost to no shows on busy nights. Competition makes reservations more attractive as long as enough customers will consider dining at either restaurant. When there are many firms in the market, it is rarely an equilibrium for none to offer reservations. Second, we show that reservations can increase sales by shifting demand from a popular peak period to a less desirable off-peak time. This is accomplished by informing diners that the peak is full. In this setting, competition may make offering reservations less attractive and a market with many firms may have no one offering reservations.
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