Quality competition and reputation of restaurants: the effects of capacity constraints

Abstract

Capacity constraints have major effects on restaurant competition. This article captures the impact of capacity constraints on quality and quantity competition of restaurant industry by employing a two-stage asymmetric capacity constraints model. There are several findings from this study. First, results of this study indicate that reputation difference increases total outputs and quality in equilibrium. Second, capacity constraints decrease the consumer surplus (CS) as well as social welfare (SW), but restaurants benefit from capacity constraints sometimes. Third, capacity reduces both the quality and quantity of the competitor. Furthermore, restaurants raise their prices if consumers are quality-sensitive or lower the quality if consumers are price-sensitive under capacity constraints. Fourth, this study compares the total quality, CS, and SW under four cases: no restaurant faces constraints, small restaurant faces constraints, big restaurant faces constraints, and both small and big restaurants face constraints. The total quality investment, CS, and SW are highest if a small restaurant faces capacity constraints while the larger one does not.