Econometrics and Applied Micro Seminar

This paper considers a novel explanation for the spread of chain firms. The conventional explanation for this phenomenon is that forming chains generates economies of scale in costs. An alternative explanation is that chain formation helps firms develop reputations in otherwise low information settings. Consumers value this reputation and will pay a premium for it. I consider these explanations empirically with a large and detailed dataset on the hotel industry. I find substantial evidence of a chain premium caused by low consumer information and no economies of scale. Furthermore, this chain premium is declining as online reviews improve consumer information.