The more difficult question to answer is whether the public's reviews are reliable measures of a restaurant's actual quality. "This is one reason why consumer demand is shifting from chain to independent restaurants in the period following the introduction of Yelp," Luca writes. But review sites are leveling the playing field by allowing consumers to learn as much about independent restaurants as they know about the chains. Friday's of the world have been safe bets for diners because their fare is of an expected quality and their menu well-known-thanks in part to big-budget advertising behind the chains. Indeed, he believes the data suggests that local eateries are starting to siphon off customers from the "Big Boys." Why? The Applebee's and the T.G.I. "People are not using Yelp to find out about McDonald's."īut Luca says the big chains should not be comforted by the findings. "Yelp is somewhat of a substitute for traditional forms of reputation," says Luca. That makes sense according to economic theory, says Luca, since diners presumably already have some knowledge about chain restaurants, but can benefit from more information about their neighborhood spots. Chain restaurants, in particular, were largely unaffected by the ratings, while the greatest effect was shown for independent restaurants. When the dust settled, Luca determined that each ratings star added on a Yelp review translated to anywhere from a 5 percent to 9 percent effect on revenues (depending on the control variables and means of estimation)-more than he had expected.Įven more interestingly, within that number not all restaurants were created equal. The result: Luca could directly trace the effect to the ratings on Yelp. By applying a regression discontinuity analysis, Luca could study how revenues jumped when star thresholds were crossed and compare these with the more steady changes over time. Hence restaurants with similar ratings can have very different rounded ratings displayed to consumers. In order to establish causality between reviews and a restaurant's success, Luca took advantage of the fact that Yelp rounds its ratings to the nearest half-star-so, for example, a 3.26 rating would be rounded up to 3.5 stars, and a 3.24 rating would be rounded down to 3 stars. Luca compared the ratings over time with revenue data from the state of Washington to gauge how reviews impacted restaurants' bottom lines. Luca chose to investigate Yelp not only because it was the first restaurant site to emphasize user reviews over professional critics, but also because of its historical database that tracks every review. By contrast, The Seattle Times had reviewed roughly 5 percent. In Seattle alone, Yelp, which launched in 2005, had accumulated 60,000 reviews by 2009, rating 70 percent of the city's restaurants. In theory, ratings sites fill in the gaps by providing a tremendous amount of information on which to base decisions. "Restaurants are a classic example in economics where the consumer has to make a decision based on very little information," he says. To get a handle on the phenomenon, Luca focused on one of the most common uses of online ratings: restaurants. Luca is looking at rankings, expert evaluations, online consumer reviews, and quality disclosure laws to see how they work in market settings, and which are most important for consumers. How reputation is earned in the digital age is a fertile area of his research. "I have always been interested in how companies form their reputations, not only restaurants and hotels but also schools and doctors," says Luca. ![]() In the paper Reviews, Reputation, and Revenue: The Case of, Harvard Business School Assistant Professor Michael Luca set to find out exactly by how much, and identify winners and losers in the process. Most would agree these sites do influence consumers' decisions. “Restaurants are a classic example in economics where the consumer has to make a decision based on very little information” Along the way, they've earned a loyal following from fans, but also the ire of businesses that find themselves hurt by dyspeptic reviews. ![]() In recent years, consumer review sites including Yelp, Citysearch, and TripAdvisor have become the first stop for recommendations on everything from dinner to dentists.
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