Assistant Professor of Business Administration
Michael Luca is an assistant professor of business administration in the Negotiation, Organizations, and Markets Unit. He teaches the Negotiations course in the MBA elective curriculum.
Professor Luca applies econometric methods to field data in order to study the impact of information in market settings. He investigates the types and features of information disclosure that are most effective, the way in which information disclosure is produced and designed, and how these phenomena affect market structure. In his research, Professor Luca considers rankings, expert reviews, online consumer reviews, and quality disclosure laws.
His current work focuses on crowdsourced reviews, analyzing a variety of companies including Yelp, Amazon, and Airbnb. His findings have been written and blogged about in such media outlets as The Wall Street Journal, The New York Times, The Washington Post, The Huffington Post, Chicago Tribune, Harvard Business Review, PC World Magazine, and Salon.
Professor Luca received his Ph.D. in economics from Boston University and a bachelor’s degree in economics and mathematics from SUNY Albany. Before beginning his doctoral studies, he worked as a health-care actuary for major insurers.
The growth of consumer review websites over the past decade has revolutionized the way in which consumers learn about product quality. The centrality of information to consumer welfare has also been underscored in public policy debates, where quality disclosure has become an increasingly popular policy instrument. How do these new sources of information affect consumer decisions and firm incentives? Professor Luca uses econometric methods to investigate this question, with a research agenda at the intersection of public policy and industrial organization.
To determine whether online consumer reviews influence the way that reputation is formed, Professor Luca has combined reviews from the website Yelp.com with public restaurant data. He has shown that a one-star increase in Yelp ratings results in a 5- to 9-percent increase in an independent restaurant’s revenue. Further, while chain restaurants are unaffected by rating changes, their market shares decline as Yelp penetrates the market.
Professor Luca also examines which features of review websites have the largest impact on consumer decision making. He has found that while consumers do not use all available information, they respond more strongly when a rating contains more information (number of reviews overall and number of “elite” reviewers).
The limits of reviews
Consumer reviews are an important source of information in the digital age. Yet there are limits to the role that reviews can play. In a case study, Professor Luca discusses the limits of reviews and how companies can create more comprehensive reputation systems geared toward facilitating trust in online marketplaces. In ongoing research, he is analyzing the role of information in online marketplaces such as Airbnb.
Quality disclosure and consumer behavior
Professor Luca has investigated the relationship among quality disclosure, salience, and consumer behavior. He has found that when colleges are presented by rank in U.S. News & World Report, a one-rank improvement for an institution causes nearly a percentage point increase in the number of applications it receives. Conversely, rankings have no effect on application decisions when colleges are listed alphabetically, even though the quality data and methodology to calculate the rank are provided.