Reaching for the Stars: Spatial Competition and Consumer Reviews
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Reaching for the Stars: Spatial Competition and Consumer Reviews Josh Matti1
Published online: 19 September 2020 © International Atlantic Economic Society 2020
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, censustract-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. Keywords Consumer services · Restaurants · Spatial competition · Yelp
I thank seminar participants at West Virginia University and Joshua Hall, Brad Humphreys, and Jane Ruseski for helpful comments and discussion. Josh Matti
[email protected] 1
School of Business, Georgia Gwinnett College, 1000 University Center Lane, Lawrenceville, GA 30043, USA
340
J. Matti
JEL D22 · L10 · L83 · R30
Introduction Competition is a central aspect of the market process. Competition between firms is assumed to be a disciplining force causing firms to better serve their customers. But to what extent is competition associated with better experiences for consumers and how does the effect vary across space? Although competition is an old idea in economics, relatively little empirical work outside of health markets1 has explored the effect of spatial competition on the consumer experience. Recent empirical papers focused on spatial competition include Liao and Chuang (2004) Matsa (2011) Gravelle et al. (2016) and Pennerstorfer (2017). Closest to this study, Liao and Chuang (2004) found that across 25 chain restaurants in the Midwest, greater local competition is associated with higher service quality and customer satisfaction. In the supermarket industry, Matsa (2011) found that store quality, as proxied by low levels of inventory shortfalls, increases with greater local competiti
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