Yelp has long been accused of killing small businesses, but as a trend it seems to be more likely to kill chain restaurants instead.That’s what Michael Luca of Harvard Business School argues in Reviews, Reputation and Revenue: The Case Of Yelp.com.
To weigh just how much power Yelp wields over the restaurant industry, Luca compared reviews against revenue data from all Seattle restaurants from 2003 – 2009. He found that:
(1) a one-star increase in Yelp rating leads to a 5-9% 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.
Consumer response is consistent with a model of Bayesian learning with information gathering costs. The introduction of Yelp then begins to shift revenue away from chains and toward independent restaurants.”
Also interesting was that Yelp reviewed 70% of Seattle restaurants, whereas the Seattle Times only reviewed about 5% of restaurants.
Now that small businesses have more exposure via review sites available on mobile, we can probably expect to see more of this trend.
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