Online Intermediaries, Prices, and Survival: A Study of OpenTable and New York City Restaurants.

Abstract

In recent years, online platforms have emerged across different industries to mediate previously direct business-to-consumer transactions. These platforms (examples include Uber, Airbnb, and OpenTable) transform legacy industries in various ways: They leverage data and connectivity to reduce search and transaction costs generating new gains from trade. They also function as two-sided markets, introducing network dynamics to otherwise traditional industries. We use the case of OpenTable (an online restaurant reservation platform) to investigate how the rise of digital intermediaries shifts market power and affects legacy players in an industry. We develop a model of restaurants’ decisions to adopt the reservation platform, and the effect of adoption on prices, profits, and consumer surplus. The adoption decision can be configured as a prisoner’s dilemma. Restaurants join the platform to attract customers from competitors or to protect their clientele from adopters. However, if all restaurants join, none of them gets a significant number of additional customers. Our model predicts that increasing adoption leads to higher prices and has no effect on profits. We compile a dataset of prices, survival, and OpenTable participation of over 6,000 restaurants in NYC between 2005 and 2016. Our empirical analysis confirms the predictions of the model. Adoption by competitors influences a restaurant’s adoption decision; restaurants that join the platform raise prices more than other restaurants, even after controlling for factors that may affect simultaneously OpenTable adoption and prices; and, over the long-term, participating in OT does not seem to increase the likelihood of survival.

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Location
Monterey Room, Nikko Hotel, San Francisco, CA
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