Restaurant Rating

Topics: Take-out, Review, Book review Pages: 28 (8725 words) Published: June 18, 2013
Reviews, Reputation, and Revenue: The Case of Yelp.com
Michael Luca

Working Paper
12-016 September 16, 2011

Copyright © 2011 by Michael Luca Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author.

Reviews, Reputation, and Revenue: The Case of Yelp.com

Michael Luca† September 2011

Abstract
Do online consumer reviews affect restaurant demand? I investigate this question using a novel dataset combining reviews from the website Yelp.com and restaurant data from the Washington State Department of Revenue. Because Yelp prominently displays a restaurant's rounded average rating, I can identify the causal impact of Yelp ratings on demand with a regression discontinuity framework that exploits Yelp‟s rounding thresholds. I present three findings about the impact of consumer reviews on the restaurant industry: (1) a one-star increase in Yelp rating leads to a 5-9 percent increase in revenue, (2) this effect is driven by independent restaurants; ratings do not affect restaurants with chain affiliation, and (3) chain restaurants have declined in market share as Yelp penetration has increased. This suggests that online consumer reviews substitute for more traditional forms of reputation. I then test whether consumers use these reviews in a way that is consistent with standard learning models. I present two additional findings: (4) consumers do not use all available information and are more responsive to quality changes that are more visible and (5) consumers respond more strongly when a rating contains more information. Consumer response to a restaurant‟s average rating is affected by the number of reviews and whether the reviewers are certified as “elite” by Yelp, but is unaffected by the size of the reviewers‟ Yelp friends network.



Harvard Business School, mluca@hbs.edu

1 Introduction
Technological advances over the past decade have led to the proliferation of consumer review websites such as Yelp.com, where consumers can share experiences about product quality. These reviews provide consumers with information about experience goods, which have quality that is observed only after consumption. With the click of a button, one can now acquire information from countless other consumers about products ranging from restaurants to movies to physicians. This paper provides empirical evidence on the impact of consumer reviews in the restaurant industry. It is a priori unclear whether consumer reviews will significantly affect markets for experience goods. On the one hand, existing mechanisms aimed at solving information problems are imperfect: chain affiliation reduces product differentiation, advertising can be costly, and expert reviews tend to cover small segments of a market.1 Consumer reviews may therefore complement or substitute for existing information sources. On the other hand, reviews can be noisy and difficult to interpret because they are based on subjective information reflecting the views of a non-representative sample of consumers. Further, consumers must actively seek out reviews, in contrast to mandatory disclosure and electronic commerce settings. 2 How do online consumer reviews affect markets for experience goods? Using a novel data set consisting of reviews from the website Yelp.com and revenue data from the Washington State Department of Revenue, I present three key findings: (1) a one-star increase in Yelp rating leads to a 5-9 percent increase in revenue, (2) this effect is driven by independent restaurants; ratings do not affect restaurants with chain affiliation, and (3) chain restaurants have declined in revenue share as Yelp penetration has increased. Consistent with standard learning models, 1 2

For example, Zagat covers only about 5% of restaurants in Los Angeles, according to Jin and Leslie (2009)....

References: 25
Luca, Michael and Jonathan Smith, 2010
Wang, Zhongmin, 2010. “Anonymity, Social Image, and the Competition for Volunteers: A Case Study of the Online Market for Reviews,” The B.E. Journal of Economic Analysis and Policy, Vol. 10, No. 1, Article 44.
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