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

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.