Restaurant Tipping and Economic Efficiency in the Restaurant Market: An Economic Theoretical Analysis

Tin-Chun Lin

doi:10.4236/tel.2020.105067

Abstract

In this research, we investigated an interesting and important issue: whether restaurant tipping would lead to economic efficiency or inefficiency in the restaurant market. We applied the theory of consumer choice to link restaurant tipping and consumer behavior. According to our economic theoretical analysis, we concluded that restaurant tipping does discourage consumer demand for restaurant meals, and hence leads to a substitution effect. The presence of a substitution means that well-being has been lost due to the substitution effect of a price-distorting tip, resulting in economic inefficiency in the restaurant market.

Highlights

Numerous previous studies related to restaurant tipping have mainly focused on the consumer behavior of restaurant tipping
We investigated an interesting and important issue: whether restaurant tipping would lead to economic efficiency or inefficiency in the restaurant market
We used the theory of consumer choice to link restaurant tipping and consumer behavior

Summary

Introduction

Numerous previous studies related to restaurant tipping have mainly focused on the consumer behavior of restaurant tipping. To investigate this issue, we applied the theory of consumer choice in developing a simple model that connects consumer behavior and restaurant tipping. We did not include fast-food restaurants, such as Burger King, McDonald’s, etc., in this study because fast-food restaurants do not offer server services and tipping is not an issue. Following the parameters of the case involved in this study, the consumer can be satisfied by dining at a restaurant and shopping at a grocery store; the consumer’s utility function consists of restaurant meals (R), grocery foods (G), and the external factors that may affect the consumer’s utility (denoted by A), such as weather. The quantities of restaurant meals (R) and grocery foods (G) are factors that can be determined by the consumer; these two factors are variables. Where α and β are constant parameters and shares of restaurant meals (R) and grocery foods (G); U R ,UG > 0 ; U RR ,UGG < 0 ; and U= RR UGG > 0

The Budget Constraint Line

Equilibrium

Comparative Static Analysis

Economic Efficiency Analysis

Conclusion