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The Growing Influence of Yelp and resulting Information Cascades

In modern times, the decisions people make are increasingly influenced by social media, the internet, and other technological factors. Many rising companies have exploited these niches to provide information to consumers which then helps them with their decisions making processes. With regards to food consumption, nightlife, and a variety of local services  Yelp! has rissen to become a prime source of information.

The network of Yelp! users demonstrates mostly informational effects. An article published in September’s Economic Journal asserts that “an extra half a star on a restaurant’s overall 5-star rating, which is averaged from individual ratings, can make that restuarant 30 to 49% more likely to sell out its tables for [an] evening”.  Furthermore, the authors Anderson and Margruder found that many business disperse fake positive reviews in order attract more customers through the cascading effect. This phenomenon demonstrates the profound informational effect that Yelp! can wield over potential consumers, and not surprisingly restaurants and other business take very seriously what’s posted about them online.

Anderson and Magruder found in their study that, “higher ratings cause restaurant to sell out the prime-time table 19 percentage points more frequently. . . These effects are largest for restaurants where information is most scarce; restaurants that are not externally accredited sell out 27 percentage points more frequently when they receive an extra half-star”.  We can once again view this in the form of a cascading phenomenon. If one is more familiar with a restaurant, they are less likely to be influenced by others opinions and instead are more likely to be confident in their decision to dine there. However if one is unfamiliar with the restaurant/business/service,  people are more likely to refer to the reviews of others (invoking the cascading effect) – this is exactly what the study shows.





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