Experience Stern | Faculty & Research

Overview: Ratings on platforms such as Yelp and TripAdvisor can greatly impact high-priced New York City restaurants that service tourists, but have less of an effect on restaurants frequented by “locals” outside of tourist areas, according to new research from NYU Stern, Cornell SC Johnson College of Business, and University College London.

The co-authored paper, “Rating Systems and Increased Heterogeneity in Firm Performance: Evidence From the New York City Restaurant Industry, 1994-2013,” was written by NYU Stern Professors Gino Cattani and Joseph Porac, Stern alumnus and University College London Professor Daniel Sands (PhD ’21), and lead author and Cornell Professor Jason Greenberg.

Why study this now: Locals have firsthand information and experience with restaurants in their area, so they know the nuances of different offerings, the authors noted. Consequently, they are less reliant on rating platforms. Tourists, on the other hand, lack this firsthand information, so they must rely on rating platforms to inform their choices.

What the researchers found: To discern and measure the impact of Internet-enabled rating platforms on restaurant performance, the researchers set out to gather continuous ratings information both before and after the proliferation of digital rating platforms. They also needed performance measures for thousands of private businesses. Their approach was to apply for and gain access to restricted-access government data that included restaurant sales data. 

This study is one of the first to look at the market-level effects of introducing third-party rating platforms on business performance, and the results suggest that these effects vary depending on customer informational needs.

The research is valuable for restaurant owners and managers because it identifies consumers who seek, and are influenced by, ratings platforms such as tourists and consumers of the highest-priced restaurants, the authors added. It also underscores the importance of tuning into the nuanced information those consumers seek and need.
Ratings are valuable in helping consumers make choices, but they also have implications for business performance that impact all stakeholders in a business.

Key insight: “Our work ultimately suggests that online ratings have affected how firms compete and capture value,” explained the authors. “Managers thus have opportunities to use ratings systems to their advantage. Ultimately, we show that to understand the importance and impact of ratings information effects, one must consider the nature of competition within particular market segments.”

The research was funded by a grant from the National Science Foundation, and the paper was published in the Strategic Management Journal. 

This piece was adapted from a story in the Cornell Chronicle.