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An Empirical Analysis of the Consumer Information in the Restaurant Industry in Sweden

Rudell, Jill LU (2012) NEKM01 20121
Department of Economics
Abstract
A reputation good is a good that you have to consume before you can assess its quality. Therefore, there is asymmetric information in favor of the seller. This good is also characterized by the fact that people often turn to friends and family for recommendations. On the contrary to standard economic theory of competition, an increased number of sellers on a market for reputation goods may lead to an increase in the market equilibrium price. The motive is that it is more difficult for consumers to keep themselves informed of potential sellers when the market grows, making information more asymmetric.

The quality of a restaurant visit is often difficult to assess in advance and it is also common to consult previous visitors about their... (More)
A reputation good is a good that you have to consume before you can assess its quality. Therefore, there is asymmetric information in favor of the seller. This good is also characterized by the fact that people often turn to friends and family for recommendations. On the contrary to standard economic theory of competition, an increased number of sellers on a market for reputation goods may lead to an increase in the market equilibrium price. The motive is that it is more difficult for consumers to keep themselves informed of potential sellers when the market grows, making information more asymmetric.

The quality of a restaurant visit is often difficult to assess in advance and it is also common to consult previous visitors about their experience. There is thus reason to believe that restaurant visits may be classified as reputation goods. The purpose of this thesis is to study whether there is any evidence of asymmetric information in general and to test whether the pricing follows the same patterns as that of a reputation good in particular.

Cross-sectional data for 71 Swedish municipalities is used to empirically test the theoretical predictions. Both ordered logistic regression and multiple regression are used as methods to analyze if there exists any relationship between both price and quality level and the amount of consumer information available on the market. The theory is tested using three different consumer information variables to test whether any of them is better at explaining a possible relationship.

When the number of inhabitants and the number of sellers were used as proxies for consumer information, no significant effect was found on neither quality level nor price. However, a significant positive relationship was found between a seller density variable and price. The number of sellers per capita was high in those municipalities known to be visited by many tourists. Since the possibility to inform oneself by making inquiries to acquaintances is heavily reduced when you only visit a market as a tourist, it is reasonable to assume that the consumer information is particularly low on these markets. (Less)
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author
Rudell, Jill LU
supervisor
organization
course
NEKM01 20121
year
type
H1 - Master's Degree (One Year)
subject
keywords
Consumer Information, Reputation Goods, Moral Hazard, Restaurant Industry, Asymmetric Information, Pricing
language
English
id
2517785
date added to LUP
2012-05-08 12:38:03
date last changed
2012-05-08 12:38:03
@misc{2517785,
  abstract     = {A reputation good is a good that you have to consume before you can assess its quality. Therefore, there is asymmetric information in favor of the seller. This good is also characterized by the fact that people often turn to friends and family for recommendations. On the contrary to standard economic theory of competition, an increased number of sellers on a market for reputation goods may lead to an increase in the market equilibrium price. The motive is that it is more difficult for consumers to keep themselves informed of potential sellers when the market grows, making information more asymmetric.

The quality of a restaurant visit is often difficult to assess in advance and it is also common to consult previous visitors about their experience. There is thus reason to believe that restaurant visits may be classified as reputation goods. The purpose of this thesis is to study whether there is any evidence of asymmetric information in general and to test whether the pricing follows the same patterns as that of a reputation good in particular.

Cross-sectional data for 71 Swedish municipalities is used to empirically test the theoretical predictions. Both ordered logistic regression and multiple regression are used as methods to analyze if there exists any relationship between both price and quality level and the amount of consumer information available on the market. The theory is tested using three different consumer information variables to test whether any of them is better at explaining a possible relationship.

When the number of inhabitants and the number of sellers were used as proxies for consumer information, no significant effect was found on neither quality level nor price. However, a significant positive relationship was found between a seller density variable and price. The number of sellers per capita was high in those municipalities known to be visited by many tourists. Since the possibility to inform oneself by making inquiries to acquaintances is heavily reduced when you only visit a market as a tourist, it is reasonable to assume that the consumer information is particularly low on these markets.},
  author       = {Rudell, Jill},
  keyword      = {Consumer Information,Reputation Goods,Moral Hazard,Restaurant Industry,Asymmetric Information,Pricing},
  language     = {eng},
  note         = {Student Paper},
  title        = {An Empirical Analysis of the Consumer Information in the Restaurant Industry in Sweden},
  year         = {2012},
}