with Alexei Alexandrov
Abstract
We examine the role of reservations in capacity-constrained services with a focus on restaurants. Although customers value reservations, restaurants typically neither charge for them nor impose penalties for failing to keep them. However, reservations impose costs on firms offering them. We demonstrate that reservations can increase a firm's sales by altering customer behavior. 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. We consequently evaluate various no-show mitigation strategies, all of which serve to make reservations more likely in equilibrium. Competition also makes reservations more attractive; when there are many small firms in the market, it is never an equilibrium for none to offer reservations.