Are Reservations Recommended?

31 Pages Posted: 27 Sep 2011

Date Written: August 31, 2011

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 offer a novel motivation for offering reservations that emphasizes the way in which reservations can alter customer behavior. We focus on a market in which demand is uncertain and the firm has limited capacity. There is a positive chance that the firm will not have enough capacity to serve all potential customers. Customers are unable to observe how many potential diners are in the market before incurring a cost to request service. Hence, if reservations are not offered, some may choose to stay home rather than risk being denied service. This lowers the firm’s sales when realized demand is low. Reservations increase sales on a slow night by guaranteeing reservations holders service. However, some reservation holders may choose not to use their reservations resulting in no shows. 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, reservations are always offered.

Keywords: Service management, reservations, restaurants, capacity management

Suggested Citation

Alexandrov, Alexei and Alexandrov, Alexei and Lariviere, Martin, Are Reservations Recommended? (August 31, 2011). Simon School Working Paper No. FR 11-30, Available at SSRN: https://ssrn.com/abstract=1933879 or http://dx.doi.org/10.2139/ssrn.1933879

Amazon.com ( email )

Seattle, WA 98144
United States

Martin Lariviere

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive
Evanston, IL 60208
United States

HOME PAGE: http://operationsroom.wordpress.com/

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