Abstract
Competition is a key feature of the market process assumed to improve market outcomes. But how strong is the relationship between competition and positive consumer experiences, and how does the relationship vary across space and type of competitor? Phoenix is a suitable setting in which to explore these questions because it is a major metropolitan area with thousands of unique restaurants rated on Yelp. The consumer experience is measured based upon Yelp user-generated reviews through July 2016, with higher ratings reflecting better customer experiences. Competition is defined in different ways depending upon the number of overall, same-price and same-type restaurants nearby. Given differences between chain and independent restaurants, competition is further segmented across these two types of establishments. After controlling for restaurant characteristics, census-tract-level demographics, census-tract fixed effects and sub-industry fixed effects the results suggest that spatial competition is only associated with better customer experiences for same-category independent restaurants within driving distance (1-5 miles). The association is not present for overall and same-price independent restaurant competition nor for chain restaurants. Consistent with the sprawling layout of the Phoenix area, the effect of competition is only for restaurants within driving distance. These findings are relevant for cities designing policies to attract residents by offering high-quality consumer amenities.
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Notes
See Gaynor and Town (2011) for a thorough review of the health industry competition literature.
Periodically, Yelp publicly makes available business and review data for select cities in what it refers to as the “Yelp Dataset Challenge”. The Yelp data used in this paper come directly from Yelp through what it has made publicly available. These data are cross-sectional, containing information on Yelp-rated establishments as of July 2016.
Census-tracts are small geographic areas designed by the Census to generally contain around 4,000 inhabitants. The minimum population of zero comes from one census tract, the tract located in the Phoenix airport.
Ordered logit and tobit models were also estimated. The results are similar and available upon request.
The five-mile threshold is selected because in https://www.yelp.com/ searches five miles includes ‘driving’, ‘biking’, ‘walking’ and ‘within 4 blocks’ distances. It reflects the relevant range over which Yelp users search for restaurants.
For restaurants like McDonald’s with more than one Yelp category, the category fixed effect σc will include multiple categories. For example, with McDonald’s the dummy variable is 1 for “Fast Food” and “Burger” but 0 for all other categories.
If two restaurants have the same categories multiple times, they are treated as competing along multiple dimensions. For example, since Burger King is also a fast food burger restaurant, it is counted as competing against McDonald’s both as a burger restaurant and as a fast food restaurant. This construction allows restaurant competition to be weighted by the degree of similarity between restaurants.
According to Yelp, the price range is the approximate cost per person for a meal consisting of one drink, tax and tip where $= under $10, $$=$11-$30, $$$=$31-$60, and $$$$= above $61.
Yelp does not contain information about whether a restaurant is independent or part of a chain. Thus, restaurants are classified based upon the Technomic Chain Restaurant Report (Restaurant Business, 2017). The name of each Yelp-rated restaurant is cross-referenced to a list of the names of the 250 highest-revenue restaurant chains.
Agglomeration is an alternative explanation for why more nearby competitors is associated with higher ratings. Agglomeration factors such as knowledge spillovers, labor-market pooling and input sharing (Rosenthal and Strange, 2001) that increase productivity may lead to higher ratings. However, if higher productivity through agglomeration benefits is why ratings are higher for establishments with more nearby competitors, then it is unclear why the relationship is not present for chain restaurants or for certain types of competition for independent restaurants. Competition, rather than agglomeration makes better sense of the results. The positive relationship between nearby competitors and ratings is only for establishments most able to adjust to competition (independent restaurants) and for stronger forms of competition (same category and same price).
Table 5 Estimated effect of competition on independent restaurants through July 2016 The sprawling structure of Phoenix has even drawn the attention of the satirical news organization The Onion with an article entitled “New Study Finds Most of Earth’s Landmass Will be Phoenix Suburb By 2050” (The Onion, 2016).
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I thank seminar participants at West Virginia University and Joshua Hall, Brad Humphreys, and Jane Ruseski for helpful comments and discussion.
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Matti, J. Reaching for the Stars: Spatial Competition and Consumer Reviews. Atl Econ J 48, 339–353 (2020). https://doi.org/10.1007/s11293-020-09679-x
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DOI: https://doi.org/10.1007/s11293-020-09679-x