I remember when the New York Times food critic Pete Wells named a small ramen pop-up shop in Queens his favorite in New York City. It was refreshing to see a then no-name shop beat out the big establishments, but it was also a certified bummer: My friends and I knew there was no chance we’d get to eat there anytime soon. And in fact, things actually seemed to get worse—after being named number one, the shop was so overwhelmed by customers that the owners shut the shop down. Many blamed The Times for closing the best ramen shop in the city though the owners later stated that they closed because they were afraid of a crackdown on the pop-up after so much press.
The surge in customers to one’s favorite spot causing negative effects is what economists call consumption externalities—when a spike in consumers either raises prices or makes others worse off. In a new paper, economists Laurent Bouton and Georg Kirchsteiger consider whether information regarding the quality of something is really a good thing for customers, and they find that it can be harmful.
“The starting point of this project is probably the never-ending debate about university rankings,” explains Bouton. “The focus was (and is still) mostly on the methodology of these rankings… Even if the accuracy of the measurement of quality is obviously a very important component of any ranking, we were thinking about this ranking debate from a different angle: Let’s assume that rankings are perfectly accurate, are they always good for consumers? We were particularly interested in identifying the type of markets in which rankings could be harmful for consumers.”
They looked at a hypothetical situation in which two restaurants are priced differently. They hypothesize that the restaurant with the higher prices will attract “foodies,” while the restaurant with lower prices will attract “normal” customers. Studies from school choice and health-plan choice show that customers will react to information about quality. In their model, if suddenly a food critic or publication deems the more expensive restaurant as “better,” the normal customers will likely flock there. But the same thing also happens if the rankings deem the less expensive restaurant as the better choice. So in both cases, it causes a negative effect for those who originally patronized the restaurant by sending another group of customers there.
This particular study doesn’t go beyond the theoretical model. Of course, in real life, foodies aren’t quite so focused on solely expensive restaurants, but the economic analysis seems to describe what people see in real life when their favorite restaurants become critical darlings—that different groups of consumers will converge to increase demand, which in turn should cause prices to rise. Research has shown this to be the case: A Michelin star translates into a 20 percent price hike for restaurants in Paris; an extra star on the website Yelp results in a 5 to 9 percent increase in revenue.
To some extent, there’s always some controversy when something is named the best of anything; rankings tend to show the taste of either one person, or one group of critics. While beloved books and movies getting the acclaim (and profits) they deserve is cause for cheer, some might feel that great things with limited demand—such as a restaurant (which has limited seats) or your favorite hairdresser (who has limited time in a day)—might be better kept secret. The authors write that this is an example when more information doesn’t necessarily benefit customers. They note the irony of this situation: “One of the conditions we identify is that consumers care sufficiently about quality. Ironically, it is when the information provided by the ranking is very important for consumers that it is most probable that it will hurt them.”
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