Technological advances over the past decade have led to the proliferation of consumerreview websites such as Yelp.com, where consumers can share experiences about productquality. These reviews provide consumers with information about experience goods, which havequality that is observed only after consumption. With the click of a button, one can now acquireinformation from countless other consumers about products ranging from restaurants to moviesto physicians. This paper provides empirical evidence on the impact of consumer reviews in therestaurant industry.It is
unclear whether consumer reviews will significantly affect markets forexperience goods. On the one hand, existing mechanisms aimed at solving information problemsare imperfect: chain affiliation reduces product differentiation, advertising can be costly, andexpert reviews tend to cover small segments of a market.
Consumer reviews may thereforecomplement or substitute for existing information sources. On the other hand, reviews can benoisy and difficult to interpret because they are based on subjective information reflecting theviews of a non-representative sample of consumers. Further, consumers must actively seek outreviews, in contrast to mandatory disclosure and electronic commerce settings.
How do online consumer reviews affect markets for experience goods? Using a novel dataset consisting of reviews from the website Yelp.com and revenue data from the WashingtonState Department of Revenue, I present three key findings: (1) a one-star increase in Yelp ratingleads 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 inrevenue share as Yelp penetration has increased. Consistent with standard learning models,
For example, Zagat covers only about 5% of restaurants in Los Angeles, according to Jin and Leslie (2009).
For an example of consumer reviews in electronic commerce, see Cabral and Hortacsu (2010). For an example of the impact of mandatory disclosure laws, see Mathios (2000), Jin and Leslie (2003), and Bollinger et al. (2010).