No Thumbnail Available
Movahed, Mohammad
Journal Title
Journal ISSN
Volume Title
Middle Tennessee State University
How does a firm respond to competition? In many businesses quality and price are the two major components of spatial competition. In price and quality competition, high quality is associated with high prices and low quality with low prices (Chioveanu 2012). Since low-quality businesses can eventually shift into a higher quality, a higher price business with a higher quality may need to raise quality to maximize profits. Also, when a new firm enters the market, nearby incumbent firms may increase their quality up to a higher level to retain their customers. This quality competition procedure is an intriguing research area for industrial organization economists as well as urban economics researchers. An owner can attract more customers by either lowering prices or increasing quality. As the demand for restaurants increases, quality has become one of the most critical factors in evaluating customer satisfaction. Quality, therefore, is endogenously chosen by restaurants (Berry and Waldfogel 2010). If two restaurants have the same price, higher quality can make one restaurant successful if it is in the same location as a rival. In this way being aware of the satisfaction expected by the customers gives the restaurant an advantage in the highly competitive market. The most likely scenario is that shifting the customer satisfaction of competitors would affect demand for the restaurant, and, as a result, they may adjust the quality based on the quality of competing restaurants. It is difficult to measure the customer satisfaction of restaurants. I argue, however, that online customer reviews can serve as a proxy for the customer satisfaction of restaurants. In recent years reviews have become a vital key to the success of restaurants. That is why restaurant owners need to be aware of the influence of review websites such as Yelp and the role that they play in popularity and profitability of their restaurants. Berry and Waldfogel (2010) showed that in the restaurant industry increasing competition will enhance the quality of firms that compete in the market. Jin and Leslie (2003) show consumer satisfaction increases when restaurants enhance their quality. This evidence of competition based on quality among restaurants leads me to investigate this relationship further. In light of recent evidence, the present research outlines the impact of competition on the quality of firms in the restaurant market by utilizing the customers’ review ratings on Yelp as a proxy for restaurant quality. In this study I present empirical evidence regarding the dynamic spatial effect of competition on customer satisfaction among restaurants. This paper improves present empirical research of quality competition by focusing on the dynamic quality competition between restaurants. Using a panel dataset of 7,610 restaurants in the Phoenix Metropolitan Area, this paper looks to address whether a shift in the customer satisfaction of rivals influence a restaurant’s customer satisfaction; whether restaurants with the same category and price have a higher effect on each other; and whether high-review entrants have effects on the incumbents’ decision to increase their quality.