Law and Economic Analysis of Service Charge in Restaurants

-Niharika Agarwal and Diya Parikh

The levy of service charge in India is at present highly contented, which has led to a war of words among various authorities of the country. This paper investigates three scenarios through an economic lens and within the boundaries of consumer rights. The pros of the three scenarios are then weighed against their cons to reach a final recommendation of the study, which in turn also proves all the three scenarios which are contended in the country at present as economically inefficient. The findings of the study show that the first scenario of tipping is proved inefficient asIndia does not have a strong tipping culture leading to undertipping, along with that tips are only realised to the front-end workers and not the back-end workers or the cleaning staff. Secondly, the next scenario contemplates on mandatory service charge being added by default to the bill itself which is proved inefficient as it takes away the discretion of the consumers and also leads to deception of consumers resulting in the violation of consumer rights and reducing consumer surplus as a high cost. Finally, the paper looks into the aspect of the service charge being added within the price of the food itself, being inefficient because a part of the producer surplus is lost as rent paid due to revenue sharing clauses in lease agreements and the consumer is worse off due to lack of discretion in the price paid for service.

Keywords: service charge, economic efficiency, tipping, consumer rights

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