Abstract
Agglomeration benefits firms because it minimizes consumers' search costs and information asymmetry. However, the effects of agglomeration may change due to the considerable amount of information available in online platforms. Thus, drawing upon the theoretical lens of information transparency and agglomeration theory, we investigate how online reviews change the effect of agglomeration on firm performance. A total of 11,528 observations of 467 hotels show that agglomeration density positively affects firm revenue in the hotel sector. However, such an effect decreases with the increase in online review quantity (including volume and length). This change is manifested in two forms, namely, minimizing information asymmetry and increasing competition cost due to information transparency. Moreover, the positive effect of agglomeration density decreases due to the quantity of high-quality (few spelling errors and easy to understand) online reviews, but not with low-quality. We further discover that the substitution effect of online review quantity on agglomeration density is stronger for independent hotels than for branded ones, whereas the effect is similar among hotels with various qualities. Our findings provide implications for the management of online channels in changing the local agglomeration effectiveness.
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