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

Michael Luca

Harvard Business School - Negotiations, Organizations & Markets Unit

March 15, 2016

Harvard Business School NOM Unit Working Paper No. 12-016

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.

Number of Pages in PDF File: 41

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Date posted: September 16, 2011 ; Last revised: March 16, 2016

Suggested Citation

Luca, Michael, Reviews, Reputation, and Revenue: The Case of Yelp.Com (March 15, 2016). Harvard Business School NOM Unit Working Paper No. 12-016. Available at SSRN: http://ssrn.com/abstract=1928601 or http://dx.doi.org/10.2139/ssrn.1928601

Contact Information

Michael Luca (Contact Author)
Harvard Business School - Negotiations, Organizations & Markets Unit ( email )
Soldiers Field Road
Boston, MA 02163
United States
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=602417
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