The Bright Side of Lower Quality: Evidence from Restaurant Exploration

The value derived from hedonic goods is affected by reference effects at the time of consumption, usually in the form of quality standards. Consumption typically involves two steps: First, the consumer chooses a given good, among a pool of available choices; then, the consumer experiences the good and derives a satisfaction from it. Between both steps, consumers might build expectations about the good that might affect the ultimate realized utility. We investigate the role of quality references in this two-stage (choice-outcome) process. We develop a flexible framework for estimating quality references and their effect in choice and outcome that can include consumers’ own past experiences, as well as that of others, and can give salience to more recent or more distant past experiences. Using novel longitudinal data from online restaurant reviews, we find evidence of quality loss aversion in the choice decision stage in accordance with prospect theory. However, in the outcome stage, we do find evidence of the opposite to loss aversion, that is, satisfaction is affected much less than one would expect when going to a lower quality restaurant. This is consistent with consumers adjusting their expectations downward and suggests that expectation adjustment protects consumers when they experience a good of lower-than-reference quality. Our results challenge the implicit assumption made by most recommendation systems that the expectation building process after making a choice does not change the outcome and imply that it may be better to patronize activities by alternating between high- and low-quality choices. This paper was accepted by David Simchi-Levi, operations management. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.04141 .