Research
Publications
The Effects of Online Review Platforms on Restaurant Revenue, Consumer Learning and Welfare (2021) (PDF) Management Science, 68 (11), P7793-8514 (Marketing Area)
Abstract: This paper quantifies the effects of online review platforms on restaurants and consumer welfare. Using a novel dataset containing revenues and information from major online review platforms in Texas, I show that online review platforms help consumers learn about restaurant quality more quickly. The effects on learning show up in restaurant revenues. Specifically, doubling the review activity increases the revenue of a high-quality independent restaurant by 5%-19% and decreases that of a low-quality restaurant by a similar amount. These effects vary widely across restaurants' locations. Restaurants around highway exits are affected twice as much as those in non-highway areas, implying that reviews are more useful to travellers and tourists than locals. The effects also decline as restaurants age, consistent with the diminishing value of information in learning. In contrast, chain restaurants are affected to a much lesser degree than independent restaurants. Building on this evidence, I develop a structural demand model with aggregate social learning. Counterfactual analyses indicate that online review platforms raise consumer welfare much more for tourists than for locals. By encouraging consumers to eat out more often at high-quality independent restaurants, online review platforms increased the total industry revenue by 3.0% over the period from 2011 to 2015.
Insights at UBC Sauder Blog: https://www.sauder.ubc.ca/news/insights/online-reviews-can-make-or-break-independent-restaurants-near-highways-study
Measuring Deterrence Motives in Dynamic Oligopoly Games (2022) with Nathan Yang (PDF) Forthcoming at Management Science (Marketing Area)
Abstract: This paper presents a novel decomposition approach for measuring deterrence motives in dynamic oligopoly games. Our approach yields a formalized, scale-free and interpretable measure of deterrence motives that informs researchers about the proportion for which deterrence motives account of all entry motives. In addition, the decomposition leads to a set of conditions for counterfactual analysis where hypothetical scenarios with deterrence motives eliminated can be explored. We later illustrate the use of our measure and counterfactual by conducting an empirical case study about the dynamics of coffee chain stores in Toronto, Canada. The inferred deterrence motives suggest that a noticeable proportion of entry motives can be attributed to deterrence; it can be as high as 43% for the increasingly dominant coffee chain, Starbucks, in certain types of markets. Finally, counterfactual analysis confirms that deterrence motives are indeed associated with Starbucks' aggressive presence as the number of its outlets and its market share are markedly lower once these motives are eliminated.
Insights at UBC Sauder Blog: https://www.sauder.ubc.ca/news/insights/major-coffee-chains-often-move-wall-out-competitors-study
Homeowner Politics and Housing Supply (2023) with Justin Tyndall and Nathan Stewart (PDF) , Forthcoming at Journal of Urban Economics.
Abstract: This paper examines whether homeowner opposition to nearby housing development affects local councillors' votes on housing bills. Homeowners benefit financially from restricted housing supply through increased housing prices. City councillors, who approve housing development applications, cater to the needs of homeowners who are often long-term resident voters with a financial stake in neighbourhood amenity levels. Using data from Toronto, Canada from 2009 to 2020, we identify housing bills through a machine learning algorithm. We find that councillors who represent more homeowners oppose more housing bills. In particular, councillors are significantly more likely to oppose large housing developments if the project is within their own ward.
Cited in 2024 Economic Report of the President: https://www.whitehouse.gov/wp-content/uploads/2024/03/ERP-2024.pdf
Working Papers
The Effect of Quality Disclosure on Firm Entry and Exit Dynamics: Evidence from Online Review Platforms (2024) with Ying Bao and Matthew Osborne (PDF)
Included in NBER Digital Economics & AI Spring Meeting 2024 and Summer Institute in Competition Strategy 2024
Abstract: This paper develops a theoretical model that studies the impact of quality disclosure on the entry and exit dynamics of firms in an industry with many firms. We employ a novel dynamic oligopoly game framework and use the oblivious equilibrium concept to solve the game. We unravel two key forces through which quality disclosure drives market dynamics: (1) the direct effect, which is the change in consumers' preference for a product once they know the true quality, and (2) the competition effect, which is the change in the competitive environment due to quality disclosure. Depending on which force dominates, several scenarios are possible. In some cases, quality disclosure can drive competition to such a fierce level that high-quality firms are discouraged from entry. To test our model predictions, we use as a case study the impact of online reviews on the market dynamics of the restaurant industry in Texas. Using a unique dataset that tracks the entry and exit of restaurants and consumers' online review activities, we empirically test the effect of quality disclosure through online reviews. Results confirm the most common predictions of our model, where the direct effect dominates the competition effect: the penetration of online review platforms encourages the entry of high-quality independent restaurants and speeds up the exit of young low-quality independent restaurants. No significant impact is found for either chains or established independent restaurants.
Shifting Standards or Changing Tastes? Unraveling Review Polarization via LLMs (2024) with Chunhua Wu (PDF)
Abstract: This paper studies the dynamics of online review polarization – the trend of increasingly extreme reviews over time – and its economic impacts. Analyzing Yelp reviews from 2005 to 2022 through a predictive approach with Large Language Models (LLMs), we distinguish between shifts in rating standards (scale effects) and changes in consumer preferences (content effects). Our results indicate a dominant scale effect in the surge of 5-star reviews, while the increase in 1-star reviews is mainly attributed to content changes. We find minimal influence of societal trends such as political polarization on review polarization. To evaluate the economic impact, we match Yelp reviews to Texas restaurant sales data. Our analysis shows that polarized reviews significantly affect sales. Notably, consumers’ restaurant choices are more significantly influenced by observed ratings than preferences revealed in review content, highlighting the significant impact of the scale effect of review polarization.
A Tax-Shaped Retail Landscape (2023) with Feng Chi, Mengwei Lin, and Nathan Yang (PDF)
Abstract: This study investigates how state tax and incentive policies shape the evolving retail landscape. Using information about retail establishments in the United States from 1990-2014, we uncover a few main insights. We first confirm that establishments are more (less) likely to open in markets with favorable (unfavorable) state tax policies. However, these inferred effects on establishment counts appear to be driven by the entry of the establishments from large retail firms/chains.
Abstract: We develop the theoretical basis for implementing non-monotonicity tests in dynamic retail entry contexts, as a means to obtain suggestive reduced-form evidence of deterrence motives. With this theoretical motivation, we then conduct two empirical case studies. Our first empirical case study focuses on competition between taco chains in Texas. In particular, we show that the test statistics for the incumbent's deterrence motives appear to be different before and after the threat of a major competitor's arrival. For our second empirical case study, we explore potential heterogeneity of the deterrence motives in competition between hamburger chains in Canada across geographic markets with and without shopping centers. The inferred heterogeneity reveals that deterrence motives are noticeably muted in markets with shopping centers, which is consistent with the potential use of exclusionary clauses between shopping centers and incumbent firms.
Risky Preemptive Investment (2023) with Nathan Yang (PDF)
Abstract: Our study characterizes the riskiness of strategic firm investment aimed at deterring competitors from entering markets. We develop the dynamic oligopoly theoretical framework for assessing the relationship between preemptive motives and survival. With monthly data about fast casual taco chains in Texas, we demonstrate that competitive conditions might be informative about the riskiness of a firm's aggressive entry strategies. In contrast, cost conditions do not appear to impact this relationship between preemptive motives and survival.
Work in Progress
The Effect of Online Review Platforms on Product Variety with Ying Bao, Zining Liu and Matthew Osborne.
Is Single-Unit Franchising Superior to Multi-Unit Franchising in Time of Crisis? with Ying Bao.