Scramble for the Table: Reservations and Scalping

Have you tried making reservations at a restaurant in New York City recently?

If so, you’ve probably realized that the struggle is real. 

This is what the next two weeks look like for 4 Charles Prime Rib, one of NYC’s prime (no pun) steakhouses: 

Bleak.

Not a single reservation is available!

How am I supposed to Instagram myself eating this burger if I can’t even get a reservation? 

The New Yorker undertook the mission of reporting on this acute problem, which is second in priority in achieving world peace: Why is it so difficult to get a reservation, and what can be done to get one? 

Apparently, the solution is to pay scalpers. 

The New York Post reports: 

“Now an elite network of resellers stands to make tens of thousands of dollars a year, while reselling sites also take a bite of the Big Apple — with some earning in the millions.

At Ralph Lauren’s posh Polo Bar, tables have been gulped up by an Ivy League, undergrad math wiz named Alex Eisler. The sophomore at Brown University has made it a business to create phony numbers and emails to snag reservations — and resell them for a healthy profit.

‘Sometimes they recognize my voice, so I have to do different accents,’ Eisler, who said he made $70,000 on bookings last year, told The New Yorker.”

Today’s article may not help you get a reservation (I’m old school, so I set the alarm and made reservations myself when I wanted to celebrate my 50th birthday at Le Bernardin), but it will help you better understand the role of reservations and queue scalpers. 

Supply is Scarce

Let’s start with the obvious: New York is a big city with numerous restaurants, so any hungry soul can find a place to eat. 

But that’s not the problem… 

The problem is that everyone wants to eat at the same restaurants. In many of these cases, price is not an issue. In fact, the higher the price, the harder it is to find availability. 

In most top restaurants, you must have a reservation, and considering that people all around the world travel to New York City and feed off the same social media frenzy surrounding these top restaurants, securing a reservation becomes an almost impossible task!

The solution? As I mentioned, people with enough free time and/or superior technical capabilities, who can develop bots that grab reservations, and then use the AppointmentTrader site to monetize them. 

Three questions: 

1. Is it always optimal to offer reservations? Should restaurants aim to book the entire restaurant through reservations, or is it smarter to save some capacity for walk-ins, even for top restaurants? 

2. What role do queue scalpers play and are they really creating value?

3. Should restaurants try to capture the value from this excess demand, or should they be trying to combat these scalpers? 

Reservations vs Walk-ins

Most top restaurants require reservations. Some allow walk-ins, but only when there are last-minute cancellations, and some don’t allow walk-ins at all. 

For example, if you walk in at Le Bernardin (NYC), you can only access the lounge, not the main dining area. 

If you’re wondering why a place with excess demand only books part of their dining area, the paper “Are Reservations Recommended?” explores the economic implications and operational considerations for this practice.

The researchers’ motivation stems from the paradox that restaurants offer reservations without charging for them despite the significant costs involved, which often include staffing for managing reservations and potential revenue losses from no-shows. This practice persists even though no-shows, which range from 3% to 40%, pose a financial risk to restaurants. 

The authors propose a new rationale for offering reservations, highlighting how customer behavior may be influenced. The analysis considers a market characterized by uncertain demand (some evenings are slow, and some are very busy) and constrained capacity.

It may seem counterintuitive, but restaurants face an interesting trade-off: Reservations are valuable in a weak market but costly in a strong one.

Without the option to reserve a table, some customers may not want to face the risk of being turned away and might choose not to visit at all, reducing the restaurant’s sales on slow days. By ensuring service to those with reservations, restaurants can boost sales during slower periods. Nevertheless, the issue of no-shows (customers who make reservations but fail to show up) poses a problem, causing potential sales losses during peak times. The authors thus assess various strategies to reduce the impact of no-shows, ultimately making reservations more viable in equilibrium. Moreover, the paper shows that allowing reservations becomes a universally attractive strategy in a competitive market characterized by several small restaurants.

One important aspect of the model is that people walk in based on their belief in how many seats will be available. If a restaurant never has available seats, no one will attempt to walk in, which makes no-shows even more costly. 

For high-end restaurants which likely experience high demand and expectations in customer service (e.g., Le Bernardin), the decision to offer reservations involves balancing the enhanced customer service and predictable demand management against the costs of potential no-shows. The paper suggests that in such competitive environments, strategies like charging no-show fees or using technology to manage reservations efficiently, mitigate risks while enhancing the customer experience and operational efficiency.

But what happens when customers can’t make reservations to begin with?

The Role of Queue Scalpers

There’s no such thing as a market vacuum that doesn’t find a way to be filled. If you can’t find a reservation, the invisible hand will call the restaurant to make one, and then sell it to you for an exorbitant price. 

If you want a table for May 12th, you must pay $820 just for the right to pay $129 for their Bone-In Ribeye Steak: 

The paper “A Model of Queue Scalping,” addresses several aspects of queue-scalping, focusing in particular on how this phenomenon affects service systems and its implications for businesses and consumers.

The system is not exactly that of a queue, but it’s close enough. 

The study is motivated by the increasing prevalence of queue-scalping, which has been facilitated by technological advancements, and has become a significant business operation, not only in New York. 

The primary research question explores how queue-scalping affects service systems, the optimal strategies for queue scalpers, and the overall impact on customer welfare and system efficiency.

The methodology involves a queueing-game-theoretic model where profit-maximizing queue scalpers decide on how many scalpers to dispatch (if they ever grow to be more than solo players) and what scalping price to charge. The model assesses the strategic interactions between scalpers and delay- and price-sensitive customers, and explores the dynamics of these interactions under different system demand volumes.

The paper shows that when capacity is fixed (which is the case for most restaurants), scalping generally improves system throughput and social welfare when delay costs are distributed less elastically to price changes. However, the benefits are mostly accrued by the scalping firms and often don’t translate into gains for the customers, which explains customer resentment toward scalping.

The implications of these findings can be extended to understand the challenges of finding reservations in popular New York City restaurants and the role of services like AppointmentTrader. In high-demand situations like popular dining spots in NYC, queue-scalping models can parallel reservation-scalping services that sell high-demand reservations at a premium. The study suggests that while such services can improve access for certain customers (typically wealthier or more desperate), overall they may lead to increased dissatisfaction among the general customer base unless managed carefully to balance profit motives with customer welfare.

So if customers (or at least most customers) aren’t happy with this practice and restaurants can’t monetize their excess demand, why don't restaurants do something about it? 

Are Free Reservations the Optimal Practice?

Let me ask the following question: Why are restaurants leaving so much money on the table? 

I know that many people oppose charging for priority in queues —we’ve discussed the pros and cons of this before. 

But when restaurants don’t, someone else does. 

And this leads to a perverse situation where the value creator (the restaurant) is allowing someone else to capture the value (the scalper). 

It’s even crazier when you realize that the restaurant is taking all the risk (building the brand, building the menu, sourcing the ingredients, hiring and paying the staff) only to be at the behest of the scalper, who may be charging too high of a price on AppointmentTrader and ultimately causing a reserved seat to remain empty. 

In fact, scalpers have every incentive to grab more seats (making it even harder for “regular” people to find reservations) just so they can sell them at a higher price. 

It’s crazy! 

Now, I understand that some of the value that scalpers capture is unrelated to the restaurant’s food and experience since it’s value that is created via scarcity. It’s a social phenomenon in the sense that it’s the scarcity that drives demand, and when people can say that “THEY” were able to get a reservation, it signals some type of social status. I haven’t been to 4 Charles, but I can’t imagine that the mere ability to dine there is worth $820 —and I’ve been to several three-star Michelin restaurants (which 4 Charles isn’t). I like good food, and I’m a social person (sort of), but if I'm looking for a good steak or burger, I’m sure I can find other great places that will gladly take my $129 without expecting me to pay $820 just to sit at the table. 

Nevertheless, restaurants should be able to monetize their scarcity. 

First, we must agree that the current reservation system offered by most restaurants needs to be revised. 

So what’s a better option?

I’ve already praised Tock before. 

The idea, which started at Next in Chicago, is that customers pre-pay the entire meal when they make the reservation. 

This solves multiple problems: if a meal is prepaid, it’s irrelevant if the customer shows up or not. Restaurants can price dynamically —as the founder says, “Tuesday is not Saturday.” Food is sourced more efficiently and accurately, thus reducing food waste, and it also has the additional benefit of not allowing scalpers to exploit the system. 

For example, at Per-Se, a 3-Star Michelin restaurant in NYC (which I would take over 4 Charles any evening), you must pay $450 for the private east room experience. 

You get the meal and the reservation, and the restaurant is the only one benefiting from it. 

Restaurants want to filter their clientele to those who value the experience enough to pay a premium, thus matching the right audience to the service. However, the current reservation system doesn’t support this dynamic. Instead, restaurants maintain a somewhat neutral stance when it comes to their reservation system, becoming bystanders in their value chain, bearing the costs while others capitalize on the situation by securing and reselling reservations at higher prices. 

Wrap-Up

I understand that many restaurants don’t like this system because it may deter people from committing to paying the full amount before they even know if they’ll be able to make it, but I don’t think the current system solves the problem either. 

This is an example of how knowing queueing theory doesn’t give you any advantage when you’re actually stuck waiting in line or can’t find a reservation.

However, knowing this dynamic, I would gladly pre-pay for a reservation on Tock rather than pay reservation scalpers (at least for now). 

While I can’t contribute significantly to world peace, I can try to shift the equilibrium to a more sane reservations scene in New York City.