Yelp’s Effect on Restaurants
Network effects affect individual decision-making because network effects provide the individual with some information or idea about whether something is good or not. Individuals choose one thing over another in order to maximize their payoff. This article looks into the effect that Yelp has on the restaurant industry. According to this article, 70% of all restaurants in Seattle are listed on Yelp as of 2009, which shows the large amount of data and influence Yelp has. Since Yelp allows other consumers to review various restaurants, individuals who look at Yelp are gaining more information from that. If a restaurant receives many good reviews, it is rational for the individual to follow the crowd and go to that restaurant. Restaurants with good reviews are correlated with an increase in their revenue (one star of improvement is about 5-9% increase in revenue).
However, chain restaurants do not show the same correlation as independent restaurants. This is because customers expect the same consistency and service from chain restaurants, so Yelp reviews do not really give them more information that will impact their decision. There are two categories of rational reasons to follow the crowd, which are information based and direct benefit. Yelp reviews actually consist of both categories. Yelp is information based because these reviews actually allow the consumer to know what other people think of the restaurant, and many good reviews mean that the restaurant is probably a good choice and there is a higher chance the individual will like it too. One of the basic ingredients of information-based effects as mentioned in class is that people make decision sequentially over time. As more people write reviews for a certain restaurant, the next person has more information to guide their decision and they are able to see the choices of people before them (whether they recommend the restaurant or not). Direct benefit comes from the idea that because the restaurant has many Yelp reviews, it must be popular and by going to the restaurant, you can talk to other people about the restaurant and have a common topic of conversation. Unlike information cascades, people will actually say whether or not they recommend a restaurant based on their own experience, not the previous experience of the other people. Therefore, people aren’t blindly following the crowd.
https://www.aabacosmallbusiness.com/advisor/quantifying-yelps-impact-restaurant-industry-140006991.html