Online intermediation in legacy industries: The effect of reservation platforms on restaurants’ prices and survival

Across multiple industries, new online platforms are interjecting themselves as digital intermediaries in previously direct business-to-consumer transactions. A reasonable concern is that these platforms, once they become dominant, can leverage their unique position to extract surplus from both sides participating in the transaction and lead to different welfare outcomes than platform participants expected (and experienced) when they first joined the platform. We study the effects that OpenTable (an online restaurant reservation platform) had on restaurants’ prices and their likelihood of survival in NYC, during a period the platform expanded to cover most restaurants in the city. We develop an analytical model to understand restaurants’ adoption decision, and the effect of adoption on prices and consumer surplus. The model shows how the platform can induce a prisoner’s dilemma where restaurants have incentives to join the platform to poach customers from competitors or to protect its clientele from competitors. However, once all restaurants join, none of them will attract additional customers, and the costs of the platform will be passed down to diners through price increases. As the popularity of the platform grows, the platform can charge a higher fee to restaurants until extracting all the benefits it creates. To test the predictions of the model, we create a dataset containing prices, survival, and OpenTable participation for over 5,000 restaurants in NYC between 2005 and 2016. Our analysis suggests that as the platform became prevalent, the costs of the platform were passed down to consumers through price and restaurants saw no benefits in terms of survival.