Abstract
This paper uses data on local US restaurants to analyze the effect of online ratings on their advertising spending and distinguishes between advertising’s persuasive interaction with average ratings and its informative interaction with displayed rounded rating. The effect of a higher displayed rounded rating is identified using an across-threshold regression discontinuity design that utilizes the discontinuities generated by Yelp.com’s rounding algorithm. The effect of a higher average rating is identified using between-threshold regressions with and without instruments. Analyses show that a higher average rating has a complementary effect and a higher display rating has a substitute effect on local restaurants’ advertising. These two types of rating information appear at different stages in the consumer search process and lead to opposite effects on firms’ advertising strategies.
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