The End of Tourist Traps: The Impact of Review Platforms on Quality Upgrading

Abstract

Asymmetric information can distort market outcomes and harm welfare. This paper examines
how cheaper access to review platforms affects consumer behavior and firms’ incentives to
improve product quality in markets where information is traditionally limited. I first develop a
consumer search model with firms making endogenous quality decisions. The model predicts that
lower search costs shift demand toward higher-quality producers, raising firms’ incentives to
upgrade quality, especially for firms selling ex-ante lower-quality products. I then use online
ratings as a proxy for reduced consumer search costs and estimate their impact on the restaurant
industry in Rome, leveraging the abolition of mobile roaming charges in the EU in 2017 for
identification. Using a unique dataset that combines monthly Tripadvisor information with
administrative social-security records, I find that revenues and total employment in higher-rated
restaurants increased by 4–10% after the internet price drop. The effects were particularly strong
for less visible high-rated establishments, indicating a complementarity between ratings and
navigation platforms. Meanwhile, the probability for lower-rated restaurants to exit the market
doubled, while surviving lower-rated establishments hired workers with higher wages and better
experience, ultimately improving their online reputation. These findings highlight the significant
role of review platforms in mitigating asymmetric information and fostering quality upgrades.

Keywords: review platforms, asymmetric information, search costs, service industry, quality

JEL Classification: D820, D830, L150, L800