Quality Differentiation and Spatial Clustering among Restaurants

Abstract

To explore the relationship between spatial location and quality differentiation, we build a dataset of over 30,000 restaurants rated by TripAdvisor, across large UK cities. Whereas top-rated restaurants tend to locate close to other top restaurants, bottom-rated restaurants tend to locate away from each other and closer to top ones. Our theoretical model can explain the main features of observed spatial patterns. We find that an increase in the population density in the city center reduces the spatial dispersion of both top and bottom restaurants but this reduction is larger in magnitude for top restaurants. Also, a larger quality difference between top and bottom restaurants increases both the absolute and relative dispersion of top restaurants.

Keywords: Spatial competition, Quality differentiation, Hotelling model, Restaurant industry

JEL Classification: L13, L83, R12, R32