The Impact of Price on Firm Reputation (with Michael Luca)
Accepted to Management Science
While a business’s reputation can impact its pricing, prices can also impact its reputation. To explore the impact of prices on reputation, we investigate daily data on menu prices and online ratings from a large rating and ordering platform. We find that a price increase of 1% leads to a decrease of 3%-5% in the average rating. Consistent with this, the overall distribution of ratings for cheaper restaurants is similar to that of more expensive restaurants. Finally, these effects don’t seem to be driven by consumer retaliation against price changes, but by changes in absolute price levels.
Entry of new firms into platforms has ambiguous effects on incumbents firms' profitability; While entry increases competitive pressure on incumbents, supply-side expansion may attract new consumers---effectively increasing total platform size and presumably benefiting all firms. Guided by a simple model, this paper explores how firm entry affects incumbents’ outcomes in a two-sided market. Specifically, I focus on Yelp Transactions Platform, an online platform that connects consumers with local services. I study a quasi-exogenous increase in firms on the platform and exploit geographic variation to employ a difference-in-differences research design. I find that, on average, market expansion favors incumbents, though the average effect masks substantial heterogeneities: high-quality incumbent firms experience a positive effect, whereas low-quality firms perform unambiguously worse. Using a structural model, my analysis finds a non-monotonic relationship between market expansion and firm performance. Lastly, I use YTP’s granular data on consumer and incumbent behavior to explore other market outcomes and firms' strategic responses.