We analyze how local market conditions affect the quality provisioning decisions of firms and how these in turn are reflected in the digitized consumer experiences on online reviews. We build a theoretical model of an oligopoly where firms vertically differentiate their quality offerings in the presence of heterogeneous consumers and marginal costs that increase quadratically in quality. Our model suggests that increasing market size leads to a broader range of qualities offered and a decrease in the average experienced qualities. Combining demographic, population, and restaurant review data for 372 isolated markets in the U.S., we confirm the theoretical predictions and find evidence that increasing competition leads to a broader range of observable qualities and decreasing average quality in a market. These effects are particularly pronounced for restaurant types where we expect a strong relationship between quality provisioning and marginal costs.
Poster Number 16