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Seminars

Are Reservations Recommended?

Date: 10-23-2007
Start Time: 1:00pm
End Time: 2:00pm
Speaker: Martin Lariviere, Kellogg School of Management
Location: Uris 333

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 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.

This presentation is joint work with Alexei Alexandrov.

BIO

Martin A Lariviere is a Professor of Managerial Economics and Decision Science at the Kellogg School of Management.  His research has focused on the application of economics to operations management.  He has worked on problems in supply chain contracting and services with self-interested customers.  He is currently president of the Manufacturing and Service Operations Management Society of INFORMS.