Effect of Agglomeration in the Restaurant Industry

Although competition can dwindle the sales of a restaurant, it is found that restaurants tend to collocate with their competitors. Despite the associated costs, physical proximity to competitors can lead to positive externalities like increased demand and improved efficiency. We empirically examine the effect of agglomeration in the restaurant industry by understanding how the type and performance of neighboring competitors affect a restaurant. We build a Cox survival model on a dataset of 2,602 restaurants from the city of Phoenix, Arizona obtained from Yelp. The study reveals three major insights: (1) improvement in neighbor performance (footfall and ratings) was detrimental to a restaurant’s survival, (2) collocating with restaurants operating in the same price bracket had a positive influence while neighbors’ food cuisine did not make a difference, and (3) franchises perform better in neighborhoods crowded with other franchises and vice versa for non-affiliated restaurants.