Online Reputation Mechanisms and the Decreasing Value of Chain Affiliation

Abstract

This article 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 has suggested that much of the value of chain affiliation to firms comes from the ability of chain partners to use the same name, imagery, logo, and marketing to create a common brand reputation and signal specific qualities in settings with asymmetric information between buyers and sellers. As more information becomes available, consumers should rely less on branding for quality signals, and firms’ ability to extend reputations across heterogeneous outlets should decrease. To examine this empirically, the author combines a large panel of hotel revenues with millions of online reviews from multiple platforms. Chain-affiliated hotels earn substantially higher revenues than equivalent independent hotels, but this premium has declined by over 50% from 2000 to 2015. This can be largely attributed to an increase in online reputation mechanisms, and this effect is largest for low-quality and small-market firms. Measures of the information content of online reviews show that as information has increased, independent hotel revenue has grown substantially more than chain hotel revenue. This result should be viewed as descriptive, with attempts to come to near causality including the use of machine learning to derive latent dimensions of firm quality from the text of online reviews. Finally, the correlation between firm revenue and chain-wide reputation is decreasing, whereas the correlation with individual hotel reputation is increasing.