We examine the role of reservations in capacity constrained services. Previous research has focused on reservations or advanced sales as a means to raise price or segment customers. We consider the restaurant industry in which reservations generally do not impact what customers pay. Further, not all restaurants offer reservations. When they are offered, firms usually give them away and often impose no penalty for not keeping them. We first show that a restaurant never offers reservations in a stable market with homogeneous customers because some customers fail to keep their reservations. However, a restaurant may want to offer reservations if there are multiple customer segments or there is uncertainty in the number of customers in the market. In the former case, reservations alter the mix of customers served. In the latter, 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. This intuition carries over to competitive environments.
Group for Research in Decision Analysis