Mobile Location-based Recommendation Systems and Local Economy: Evidence from the Restaurant Industry

Location-based recommendations made via mobile devices have the potential to influence the success of local businesses by affecting user search and selection behavior. This research investigates the pivotal role of location-based recommendation services in vitalizing the local economy. Collaborating with a leading search engine company, we examine the distinct impacts of mobile recommendation systems to 16,720 local restaurants under the different stages of consumer decisions on the restaurant searches and selections. Contrary to the conventional findings that PC-based recommendations favor more popular items and create a rich-get-richer effect for already successful products, our empirical findings present the positive impact of recommendation systems on niche restaurants by enhancing visibility and conversion. Specifically, we find that the national launch of the location-based recommendation system makes new recommendations for previously unexposed restaurants rather than increases the number of recommendations on previously recommended restaurants. We further find that the location-based recommender induces more consumers to visit niche restaurants with higher quality measure. Together, we conclude that a location-based mobile recommendation system can well promote under-represented products without sacrificing the consumer welfare as long as niche suppliers provide enough information on their product quality. The main research findings bear significant contributions to the extant literature in theorizing the value of recommendation systems in the local economy and provide managerial implications for search businesses and local stores by suggesting the strategic use of recommendation services in their businesses that are effective in highly competitive markets.