Game theory at Denny’s
After a late night out, I found myself at the only eatery still open in the suburbs, the late night haven that is Denny’s.
When paying for the meal, I noticed a curious offer on the receipt that read something like:
If your receipt does not list a food or drink you ordered, let us know and you will get the item free plus a $5 gift certificate.
What is the reason behind this message? Why are they paying customers for incorrect bills?
My friend was quick to explain the logic.
The issue at hand is the principal-agent problem between Denny’s management and its wait staff. The management wants waiters to offer good service and ties compensation heavily to tips.
This system normally works. But a rogue waiter may play outside of the rules, say, by giving free drinks or food to seek a higher tip.
Denny’s management loses out big on the free food and it is unable to monitor this illegal activity.
What to do? The proposed solution is about changing the game. The offer on the receipt gives customers a reason to report fraud. Even more important, it destroys a waiter’s incentive to give free food or drinks. It might even be that the waiters have to pay for the gift card from their wages.
I’ve seen similar policies at supermarkets and other businesses where they pay customers if a cashier fails to issue a receipt. The logic would apply similarly.
Anyone ever cash in on such an offer? How did the management/cashier/waiter react?
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7 Responses to “Game theory at Denny’s”
I don’t see how the message on the receipt stops waiters from giving free drinks. If a person orders one coke, but the waiter gives her three cokes, will the person report the waiter? I don’t think so. In this situation, wouldn’t the receipt only list the one coke ordered?
By Asad on Mar 11, 2010
and the gift certificate ensures that you make another visit, and each visit is a business opportunity for them
By vishwanath on Mar 11, 2010
I agree with Asad.
It is more likely that the Denny’s franchisee is doing this to assure the Denny’s franchisor that they are not under reporting gross sales.
The franchisee pays royalties on gross sales, so the principal agent problem would suggest that it is in the interest of the franchisee to under report.
The franchisee can assure the franchisor that it is not under reporting by following such a policy – in some states it would not be legal to fine the employees who made the mistake.
By michael webster on Mar 11, 2010
Thanks for the clarification Michael. Come to think of it, I know Walgreens and Dunkin Donuts have a similar receipt policy so the franchise explanation seems plausible. Next time I am at Denny’s I will ask a manager and confirm.
By Presh Talwalkar on Mar 12, 2010
I have also heard that under commercial leases based on percentage sale of the retail store, the lessor does this to ensure that the leasee is “honest” about it’s sales. Many stores deal in cash so it’s harder for the lessor to track what is going on. By using this method there is at least some ability to monitor sales.
By Frank Park on Mar 14, 2010
@Frank;
I am not sure that under a standard commercial lease, the landlord would have the ability to dictate policy on receipts.
By michael webster on Mar 15, 2010
I saw a similar sign in a Subway (sandwich) store. It made sense as there is no way of figuring out exactly how much ingredients were used. A store clerk can easily adjust the ingredients of 5 extra sandwiches (without billing) in the daily consumption and pocket the revenue (or mark the extra ingredients as spoilt and dispose).
In India I’m sure the sign means we have an eye on the store clerks.
By Mehul on Mar 31, 2010