Do Tips Create Market Inefficiency? The Case of Restaurant Industry

Abstract

In this chapter, the author investigates the economic implications of restaurant tipping, that is, whether such practices induce market distortions. The author uses consumer choice theory to demonstrate the effects of tipping on consumer behavior and concludes that tipping does discourage consumer demand for restaurant meals, and hence leads to a substitution effect favoring grocery shopping. For this reason, this leads to a deadweight loss, thus undermining overall market efficiency. The author’s economic theoretical analysis shows how tipping distorts the price signal and harms consumer welfare. The main contribution of the chapter is to give a good theoretical background into restaurant management, and the theoretical model lays the groundwork for future empirical studies to validate the findings.