Abstract

 This research uses online restaurant reviews to explore how restaurants compete in a domain of product and service quality. By focusing on the fast food restaurants, which offer a similar menu of products (e.g., hamburgers) with varying product quality, we document how the restaurants adjust their offerings in the presence of competitors with distinct perceived product quality in the local market. In particular, we document how three “hipster mega chains” (Five Guys, In-N-Out, and Shake Shack) influenced the quality competition among local fast-food restaurants. While the competing local restaurants may want to improve their food offerings, for store managers of a fast food chain, such an action of improvement is limited as their menu and the selection of food ingredients are largely determined and fixed at the chain level. In this context, we explore whether the local restaurants reacted to the hipster mega chains by enhancing quality factors that are under their direct control (i.e., service quality). For our empirical analysis, we use online consumer review data from Yelp. We first document that restaurants exhibit higher star-ratings in the presence of the hipster mega chains in their local markets, applying ATE estimation via predictions made by supervised machine learning algorithm. Further, we analyze review text data. Word embeddings and clustering words to groups of similar semantic meaning reveal some significant difference in review contents depending on the presence of high-quality competitors. For restaurants competing with hipster chain competitors, customers left more comments on positive service (e.g., ‘great customer service’ and ‘friendly staff’) and fewer comments on negative service (e.g., ‘rude’, ‘unprofessional’).