Online Reputation Mechanisms and the Decreasing Value of Chain Affiliation

Abstract

This paper investigates the value of business format franchising and how it is changing in response to a large increase in consumer information provided by online reputation mechanisms. Theory suggests much of the value to firms of chain affiliation comes from the ability of chain partners to use the same name, imagery, logo, and marketing to create a common reputation and signal specific qualities in settings with asymmetric information between buyers and sellers. As more information becomes available, consumers should rely less on these quality signals and the ability for firms to extend reputations across heterogenous outlets should decrease. To examine this empirically, this paper combines a large panel of hotel revenues with millions of online reviews from multiple platforms. I find that chain-affiliated hotels earn substantially higher revenues than equivalent independent hotels, but that this premium has declined by over 50% from 2000 to 2015. I find that this can be largely attributed to an increa...