The Bureau of Labor Statistics of the U.S. Department of Labor is the principal Federal agency responsible for measuring labor market activity, working conditions, and price changes in the economy.
The reputational costs of business pricing
The authors base their analysis on transaction- and establishment-level data from the Yelp Transactions Platform,
which allows customers to place orders at local restaurants and then leave a review and a star rating (a proxy for
reputation) on the Yelp website. Looking first at star-rating distributions by restaurant price level, Luca and Reshef
observe similar ratings across variously priced establishments (3.4 stars for the cheapest category and 3.6 stars
for the priciest), suggesting that a restaurant’s reputation is influenced by both quality and price. To isolate the
causal effect of price levels, the authors conduct a within-case longitudinal analysis, controlling for fixed effects
and adopting two specifications: one tracking changes in customer ratings in the few days before and the few days
after an item’s price change, and another doing the same but focusing on a shorter time window immediately
before and after the price-change decision.
The results from these analyses point to prices having a sizable and statistically significant reputational effect. The
authors report that, for the average restaurant, a price increase of 1 percent is followed by a ratings drop of 2.5–5
percent, a large effect given that price increases average between 3 and 9 percent. Further, more granular
analyses presented in the article show that the negative reputational effect of higher prices is stronger among first-
time customers. In Luca and Reshef’s interpretation, this result implies both that consumer responses are
nonretaliatory but price driven, presumably because new customers have no prior knowledge of the establishment
they are rating, and that price levels condition consumer expectations about product quality, with lower initial
ratings indicating perceived incongruity between price and quality.
While the authors are unable to pinpoint a single mechanism through which higher prices hurt reputation, they
suggest that a mixture of c