How Markets Go Wrong

February 14, 2005 2:49 PM

These people scalp restaurant reservations.Can't find a table this Valentine's Day? If you're in LA, NY or SF, it may be because these people have reserved the seats weeks ago under an assumed name. Which they will sell you for $40. (Via MarhginalRevolution)
posted by Jos Bleau (39 comments total)

Bottom feeders.
posted by caddis at 2:54 PM on February 14, 2005

wait! i need that... i always space out on V-day reservations because my birthday is right before it. i called on saturday to get some seats and they laughed at me.
posted by nearo at 2:57 PM on February 14, 2005

brilliant!
posted by gnutron at 3:36 PM on February 14, 2005

Many restaurants already charge a markup on Valentine's Day, in addition to whatever you'd pay these scalpers. Why go to a restaurant when it's that nuts and you can get the same table for much, much less two night later, when the place is quieter and the staff is much less relaxed. There's a reason why it's called amateur night in the industry.

*goes off to cook Valentine's dinner at home*
posted by casu marzu at 3:39 PM on February 14, 2005

Nice, more people trying to make a quick buck off of circumstance. The fact that they are generating their own market demand by making bad reservations that will, in all likelihood, go largely unused means that they are damaging the industry while trying to make money off of it.

I hope they're found out and sued by all of the restaurants they've made fake reservations with.
posted by fenriq at 3:45 PM on February 14, 2005

As Alex Tabarrok at the MarginalRevolution points out, if this business model works then we'll likely see restaurants charging just for reservations in order to capture some of the value back from the scalpers.

So you might very well be paying scalper-type charges all year round.
posted by Jos Bleau at 3:51 PM on February 14, 2005

I wonder what the law says about not honoring a reservation -- for either customer or restaurant. Probably something along the lines of "You're shit out of luck."
posted by Civil_Disobedient at 3:52 PM on February 14, 2005

I would think this was clever if it weren't for the fact that they are abusing the commons without putting anything back in. If I owned a restaurant I would be checking ID tonight, refusing anyone under a fake name to nip this in the bud and calling all my restaurant friends to let them know.

A bunch of "they wouldn't honor my second hand reservation" stories the first year (which I assume is this year) would kill this quick.
posted by revgeorge at 3:54 PM on February 14, 2005

Dicks.
posted by DakotaPaul at 3:54 PM on February 14, 2005

casu marzu: A "markup"? That's putting it nicely. Fixed price menus in SF for V-day are typically so high you can come away spending $250 or more if you add drinks.
posted by Potsy at 4:08 PM on February 14, 2005

C_D: as to missed reservations, a few years ago a number of places experemented with charging no-shows, but most dropped it due to (A) severe negative customer feedback (as in "you mean I was in the hospital and I STILL had to pay??!!") and (B) most would only run the credit card number at the time of the actual no-show only to find out that the number was bogus - uhm, er, incorrect.

So restaraunts certainly can charge for no-shows, but even if they did, it still probably wouldn't put the scalpers out of business. Their operating costs have got to be so low that they could afford a relatively high rate of no-shows and still make a profit.
posted by Jos Bleau at 4:08 PM on February 14, 2005

Am I the only person who thinks this is brilliant?
posted by drezdn at 4:12 PM on February 14, 2005

All of this outrage is fake outrage, right? A gentle parody of the left-wing allergy to the market, no doubt.

A restaurant reservation is a pure commodity, which restaurants can sell or give away as they choose, but they certainly can't restrain the aftermarket, particularly when the indiscriminateness with which they pick diners is so blatant.

Also, it seems pretty elementary that someone who's spent $40 on a reservation is less likely to dishonor it than someone who's spent zero.

If restaurants start charging for reservations, more power to them. Every single such charge I've ever paid has been fully applicable to the bill, and refundable if I cancel in a reasonable period of time.
posted by MattD at 4:14 PM on February 14, 2005

Am I the only person who thinks this is brilliant?

Possibly. Do you also think ticket scalping is brilliant? I dont see any difference in the arguments reagarding this and those that have been made pro and con for scalping over the years.
posted by vacapinta at 4:20 PM on February 14, 2005

Am I the only person who thinks this is brilliant?

No.
posted by mr_roboto at 4:28 PM on February 14, 2005

I think this is opportunistic bottom feeding, its not brilliant. Its trying to make a buck in the margins without really doing anything save potentially screw over a whole lot of restaurants if they don't resell their reservations.

That's not brilliant, its fucking rude.
posted by fenriq at 4:29 PM on February 14, 2005

Here's an email from one of the proprietors of this new service, sent to everyone at the ad agency where he works:

Can't get great reservations? Buy them.

First, the un-original part: I have a website!

But here’s the original part: We make ideal reservations in advance for big, sold-out dining occasions (like Valentine’s Day), then when the date approaches and every great restaurant is totally booked, we sell them.

Today is the official launch of withoutreservations.biz, offering already-made reservations for prime-time Valentine’s Day tables for two at more than 70 of the best restaurants in LA, SF & NYC. Check out our new site and please forward this email & link to anyone you think could use its help. Thanks!

I can provide this budding entrepreneur's name/email/phone number for, say, a mere $40...
posted by Guy Smiley at 4:30 PM on February 14, 2005

In response to Jos Bleau's comment, I'd suspect restaurants would start checking that the ID on a reservation matches with a person's credit card/license before they considered charging for reservations. Simple solution with the least amount of additional effort and impact.
posted by VulcanMike at 4:34 PM on February 14, 2005

Oh, I'm pretty far to the right/lib side for MeFi and i think it's a terrible idea.

Follow this idea to its natural conclusion - everyone pays for reservations.

First, by making you pay more for something but by not increasing the value of the service, you are transfer consumer surplus to arbitragers. Consumers pay more but get the same. That's generally bad.

And unlike most markets, where high profits induce new market entrants whose competition ultimately lowers prices, this sitution would DETER market entry. New entrants (restaraunts) would only make superior profits for the scalpers, not the service providers.

That's why this is bad.
posted by Jos Bleau at 4:35 PM on February 14, 2005

vacapinta: Do you also think ticket scalping is brilliant?

I'd say there is a difference. In ticket scalping, the scalper pays for the ticket and will be in the red if he doesn't sell all tickets. In dinner scalping, the scalper runs no risk, as dinner reservations work on the honor system.

So dinner scalping is worse, I think, because it destroys an honor system that I happen to like. And on preview, I agree with Jos Bleau.
posted by Triplanetary at 4:39 PM on February 14, 2005

You could probably sue them for fraud, but a new specific, local criminal ordinance would likely be the most effective way to stop these pukes. I wonder who has more political throw, restaurant owners or the scam artists?
posted by caddis at 5:07 PM on February 14, 2005

A half-empty restaurant is not good for business.
posted by TDavid at 5:09 PM on February 14, 2005

I first became aware of this reservation crunch last New Year's Eve. I called all around and the first class restaurants in Raleigh Durham were taking credit card info for prix fixe dinners. It was a $20.00 per person cancellation fee and the full $80.00 per person charge if you didn't show up. And oh yes, they were checking the credit card.
posted by Secret Life of Gravy at 5:19 PM on February 14, 2005

I have to agree with everyone saying that these things are bad. This does nothing but damage the market and make money for the scalpers. Thats definition of a bottom feeder., in my book.

This could be fixed by resturants charging a deposite on your meal when you make a reservation. When you're done with the meal, the price of the food comes off the deposite first, and if you're under you get back what you owe.

On the other hand, that makes making a resturant reservation more of a hassle.
posted by delmoi at 5:20 PM on February 14, 2005

I can provide this budding entrepreneur's name/email/phone number for, say, a mere $40...

Why you... you... bottom-feeder! :)
posted by Civil_Disobedient at 5:32 PM on February 14, 2005

I can provide this budding entrepreneur's name/email/phone number for, say, a mere $40...

Thank you. That really made me laugh. :)
posted by vacapinta at 5:39 PM on February 14, 2005

I'm confused about this from the FAQ:

How do I cancel?
You must call the restaurant directly to cancel your reservation before the cut-off time (which may be anywhere from 24-hours to seven days in advance). We provide you with the particular restaurant's cancellation policy, but it is your responsibility. Do not call or email us to cancel your reservation. If you cancel after the cut-off time, your credit card will be charged a late cancellation fee commensurate with the restaurant's own late cancellation policy.

At what point do *you* give the restaurant *your* credit card number? It seems that you don't. What they seem to be saying is if the restaurant charges them (their credit card) a cancellation charge they will then forward the charge to you?

So, if I 1) Cancel my credit card 2) Call the restaurant and cancel, what recourse do they have? After all, according to the restaurant, they made the reservation not me.
posted by vacapinta at 5:45 PM on February 14, 2005

I trust that the restaurant folks will solve this. That is... unless they are the one behind it!
posted by R. Mutt at 8:18 PM on February 14, 2005

That's putting it nicely. Fixed price menus in SF for V-day are typically so high you can come away spending $250 or more if you add drinks.

I believe NYC's Rainbow Room hits them for $250 tonight and doesn't even include any drinks.
posted by HTuttle at 1:05 AM on February 15, 2005

This could be fixed by resturants charging a deposite on your meal when you make a reservation. When you're done with the meal, the price of the food comes off the deposite first, and if you're under you get back what you owe.

That was the norm when I lived in the UK. It made planning a dinner party fun, because if a friend couldn't come at the last minute you were out ££.
posted by fshgrl at 4:19 AM on February 15, 2005

How Markets Go Wrong

I duno, every thing seems in order to me.
posted by Steve_at_Linnwood at 5:44 AM on February 15, 2005

The problem with the "free market" take is that the broker is not providing any value to anyone. He is creating artificial scarcity by hoarding reservations, not bearing any risk of weak demand, and raking in 100% profit. This is a market failure: no truly functioning capital market rewards zero-risk arbitrageurs with 100% profit.

The root of the market failure is that there is typically no cost in not showing up for a reservation. If the reservation brokers become widespread, restaurants will be encouraged to close this loophole by charging deposits (some already do, as some have pointed out). The brokers will then bear the risk of weak demand (they'll be stuck with the deposit fees if nobody wants to buy their reservations) and this will look more like a functioning market. Indeed, restaurants could even come out ahead by shifting no-show risk to the brokers.
posted by Mid at 6:28 AM on February 15, 2005

Many restaurants require a credit card to secure reservations and will charge the card whether or not you show up.

fwiw, the restaurants do this partly in response to practices described in the FPP -- if the restaurant takes a reservation, but the customer is a no-show, the restaurant is out the money unless they do this. Since so many "amateur night" customers are either scalpers or simply don't have any respect for the restaurant (often reserving in multiple locations and then deciding where to dine at the last minute), restaurants simply have to do this. In a business with razor-thin profit margins they can't afford to have empty tables.

I don't think that this is either brilliant or abhorrent, just a rather sad fact of life. If you don't like, go to your favorite restaurant at mid-week and avoid the crowds. And please honor your reservations or have the freakin' courtesy to cancel them if you change your plans.
posted by casu marzu at 6:55 AM on February 15, 2005

This is a market failure: no truly functioning capital market rewards zero-risk arbitrageurs with 100% profit.

This is just begging the question. This very example shows that it is possible to create an artificial scarcity for something that was otherwise essentially free, and reap profits with next to no overhead. I can understand why some dislike this, but simply dismissing it as a "market failure" suggests a misunderstanding of markets.

As others have pointed out, if this practice becomes an undo burden on either customers or restaurant owner then there are a number of fairly simple market remedies. I prefer the "please show proof of ID when when arriving for dinner" approach, which does not incur a cost for simply making a reservation, but prevents hoarding by third-parties.
posted by Ayn Marx at 7:32 AM on February 15, 2005

Huh. I just went back to this and realized that Tyler Cowen is one of the contributors at MarginalRevolution. He didn't author the post linked in the FPP, but I wonder what his thoughts are on this? As many folks in the Washington, DC area know, Tyler is quite the chowhound.
posted by casu marzu at 9:01 AM on February 15, 2005

I can understand why some dislike this, but simply dismissing it as a "market failure" suggests a misunderstanding of markets.

Actually, it suggest a fairly good understanding of markets.

In a functioning market, price equals marginal cost (or implicit marginal cost of risk), and there's zero economic profit (taking into account the time value of capital, etc, which is what we usually call "profit"). Here, price is far above marginal cost, and the firm is making economic profit*. This implies that the market hasn't yet equilibrated, and is currently inefficient. Essentially, it's an inefficient transfer from restaurants (and perhaps some customers, who now can't get seated) to the reservation company.

*Either that, or they're spectacularly inefficient and it costs them $40 to make a phone call.
posted by ROU_Xenophobe at 9:20 AM on February 15, 2005

VulcanMike and the cleverly-named Ayn Marx hit it right on the head. The very easy solution for any restaurant who doesn't want to participate in such a scheme is to tell persons making reservations that they will require positive ID at the restaurant. The scalpers would be instantly out of business.

You have to at least admire the scalpers' cleverness, even if you think its a crummy thing to do. They thought of something original, put a plan in action, and (even if its only for one holiday, one time) made money on it.
posted by AgentRocket at 10:58 AM on February 15, 2005

I don't see a huge problem. If it hurts anyone, it's poor people who can't afford the scalpers' prices (who most likely can't afford the restaurants either) or restaurants who lose customers b/c of no-shows.

If restaurants lose customers or get too many complaints (or other negative effects), they'll have to change their policies.

These reservation scalpers aren't an example of "How Markets Go Wrong." It's more like "How Life with Free Markets Can Be Miserable" or "There's No Such Thing as an Honor System in a Free Market."

Basically, it's an extra $40 for a fancy dinner on Valentine's Day in NYC, L.A., and San Francisco (where's Chicago?). It's not the end of the world. If you don't like it, don't use it. Pull your head out of your ass and make an earlier reservation.
posted by mrgrimm at 2:22 PM on February 15, 2005

The very easy solution for any restaurant who doesn't want to participate in such a scheme is to tell persons making reservations that they will require positive ID at the restaurant.

This would be just another flashpoint for those who see Big Brother in everything.
posted by casu marzu at 2:28 PM on February 15, 2005