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

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  • Michael Luca

    () (Harvard Business School, Negotiation, Organizations & Markets Unit)

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.

Suggested Citation

  • Michael Luca, 2011. "Reviews, Reputation, and Revenue: The Case of Yelp.com," Harvard Business School Working Papers 12-016, Harvard Business School, revised Mar 2016.
  • Handle: RePEc:hbs:wpaper:12-016
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    References listed on IDEAS

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    Cited by:

    1. Laurent Bouton, 2011. "Good rankings are bad - Why reliable rankings can hurt consumers," Boston University - Department of Economics - Working Papers Series WP2011-002, Boston University - Department of Economics.
    2. Kakar, Venoo & Franco, Julisa & Voelz, Joel & Wu, Julia, 2016. "Effects of Host Race Information on Airbnb Listing Prices in San Francisco," MPRA Paper 69974, University Library of Munich, Germany.
    3. Marinescu, Ioana E. & Klein, Nadav & Chamberlain, Andrew & Smart, Morgan, 2018. "Incentives Can Reduce Bias in Online Reviews," IZA Discussion Papers 11367, Institute for the Study of Labor (IZA).
    4. Bar Ifrach & Costis Maglaras & Marco Scarsini, 2011. "Monopoly Pricing in the Presence of Social Learning," Working Papers 11-11, NET Institute, revised Nov 2011.
    5. Jolivet, Grégory & Jullien, Bruno & Postel-Vinay, Fabien, 2016. "Reputation and prices on the e-market: Evidence from a major French platform," International Journal of Industrial Organization, Elsevier, vol. 45(C), pages 59-75.
    6. Nicollier, Luciana A, 2013. "Reviews, Prices and Endogenous Information Transmission," The Warwick Economics Research Paper Series (TWERPS) 1029, University of Warwick, Department of Economics.
    7. Anindya Ghose & Panagiotis G. Ipeirotis & Beibei Li, 2012. "Designing Ranking Systems for Hotels on Travel Search Engines by Mining User-Generated and Crowdsourced Content," Marketing Science, INFORMS, vol. 31(3), pages 493-520, May.
    8. Liad Wagman & Vincent Conitzer, 2014. "False-name-proof voting with costs over two alternatives," International Journal of Game Theory, Springer;Game Theory Society, vol. 43(3), pages 599-618, August.
    9. Richards, Timothy J. & Tiwari, Ashutosh, 2014. "Social Networks and Restaurant Choice," 2014 AAEA/EAAE/CAES Joint Symposium: Social Networks, Social Media and the Economics of Food, May 29-30, 2014, Montreal, Canada 166112, Agricultural and Applied Economics Association;Canadian Agricultural Economics Society;European Association of Agricultural Economists.
    10. Sarigul, Sercan & Rui, Huaxia, 2014. "Nowcasting Obesity in the U.S. Using Google Search Volume Data," 2014 AAEA/EAAE/CAES Joint Symposium: Social Networks, Social Media and the Economics of Food, May 29-30, 2014, Montreal, Canada 166113, Agricultural and Applied Economics Association;Canadian Agricultural Economics Society;European Association of Agricultural Economists.
    11. Hinnosaar, Marit & Hinnosaar, Toomas & Kummer, Michael & Slivko, Olga, 2017. "Does Wikipedia matter? The effect of Wikipedia on tourist choices," ZEW Discussion Papers 15-089, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    12. Amedeo Piolatto, 2015. "Online booking and information: competition and welfare consequences of review aggregators," Working Papers 2015/11, Institut d'Economia de Barcelona (IEB).

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