Michael Anderson manuscript text

Internet review forums increasingly supplement expert opinion and social networks in informing consumers about product quality. However, limited empirical evidence links digital word-of-mouth to purchasing decisions. We implement a regression discontinuity design to estimate the effect of positive Yelp.com ratings on restaurant reservation availability. An extra half-star rating causes restaurants to sell out 19 percentage points (49%) more frequently, with larger impacts when alternate information is more scarce. These returns suggest that restaurateurs face incentives to leave fake reviews, but a rich set of robustness checks confirm that restaurants do not manipulate ratings in a confounding, discontinuous manner. Beliefs on product quality play an important role in shaping consumer demand. For many goods, consumers face ex ante uncertainty regarding the quality of the good and rely on imperfect signals to infer quality. Traditionally, expert opinion and social learning have helped consumers resolve these information asymmetries. For an expert’s take, consumers may consult Consumer Reports when buying an automobile or household appliance or they may read reviews by professional critics when selecting a movie or choosing among dining options. Alternatively, consumers may confer with peers who own the automobile or who have eaten at the restaurant. While friends and other social contacts may be less discriminating than professional critics, their tastes may be more similar to those of prospective consumers. Hoping to capitalise on this possibility, online sites that cheaply * Corresponding author: Michael Anderson, [email protected], 207 Giannini Hall MC 3310, Berkeley, CA 94720-3310, USA. We gratefully acknowledge support from the Giannini Foundation of Agricultural Economics. We thank seminar participants at U.C. Berkeley and U.C. Davis for valuable comments. All errors in the paper are the authors’.