Social networks and consumer behavior: Evidence from Yelp

Abstract

Estimates of the effect of social networks on consumer behavior may be biased, because social network formation is endogenous. Thus, it is hard to distinguish the impact of a social network from the impact of the factors leading to its formation. I exploit a machine learning technique to systematically search for groups of individuals who are similar to the extent that friendship variation within these groups is unlikely to be correlated with unobservables that affect the outcome. I apply the method using Yelp data to estimate the effect of social network friendship on restaurant choices. I find that compared to non-friends, social network friends are 64 percent more likely to visit the same restaurant. Additional exploration of the heterogeneous effects suggests that the social network effect takes place mostly through the information channel.