Next Restaurant: Pricing and Ticketing Innovation Redux

Lynne Kiesling

Last May I wrote about Next, a new restaurant in Chicago from chef Grant Achatz and his business partner Nick Kokonas. In that post I focused on the two innovations in the proposal: selling tickets concert style rather than having a reservation system, and using dynamic pricing for reservations/tickets at different times on different evenings.

Last week Next opened with great fanfare (although I don’t know first hand, because although I signed up on their email notification list I have yet to receive my login authorization for the ticketing system), and they’ve been getting attention both from foodies and economists (and economist foodies). The design feature that is receiving the most economist attention is the one that Nick Kokonas himself pointed out in a comment on my original blog post — the tickets are non-refundable but transferable.

Naturally, then, a secondary market has cropped up, with $170 tickets selling for $1000 and the like. Larry Ribstein ties his observations on such scalping into his previous work on ticket scalping. Why are such savvy entrepreneurs as Achatz and Kokonas letting secondary sellers capture so much of the surplus that they have created?

In particular, while I like the dynamic pricing, why don’t they set up a secondary market auction themselves? My Kellogg colleague Sandeep Baliga wondered the same thing yesterday at Cheap Talk, and then Jeff Ely picked it up and ran with it later in the day at Cheap Talk (note also that Nick Kokonas commented on both posts, love it). Here’s Jeff’s observations regarding my thoughts on a secondary market:

The most interesting design issue is to manage re-allocation of tickets. This is potentially a big deal for a restaurant like Next because many people will be coming from out of town to eat there. Last-minute changes of plans could mean that rapid re-allocation of tickets will have a big impact on efficiency. More generally, a resale market raises the value of a ticket because it turns the ticket into an option.  This increases the amount people are willing to bid for it.  So Next should design an online resale market that maximizes the efficiency of the allocation mechanism because those efficiency gains not only benefit the patrons but they also pay off in terms of initial ticket sales.

As Sandeep points out in the comments, setting up a resale auction that’s essentially a second-price sealed bid auction is not meaningfully different from or more difficult than any typical eBay auction in which lots of people have participated. Jeff’s auction design points are all really good, and if you’re interested you should go read them; in particular he has some suggestions for keeping scalpers from flooding the queue.

Now I just need to keep checking my email and hope that my ticket login shows up before all of the seats are sold …