The effect of demand density on firm productivity in the restaurant industry

Abstract: Many researchers have investigated the factors influencing productivity. However, the majority of studies have focused on the supply side variables and hence, the research focusing on demand side factors is small. Following the theoretical framework presented by Syverson (2004), we analyze the determinants of firm productivity and firm size in the restaurant industry in Sweden by focusing on the impact of demand density and substitutability. In the study we use data over firms in the Swedish restaurant industry between the years of 2007 and 2014. We test three different estimations; a simple bivariate OLS model, a year fixed effects model and a year fixed effects model with controls for local market variables. We use two different measures for labor productivity in the analysis; revenue per employee and value added per employee. Furthermore, we calculate five local market variables in order to illustrate the dispersion, central tendency and minimum productivity level. We find that demand density has a slight effect on firm productivity. The findings suggest that firm productivity dispersion is larger in markets with higher demand density. We find evidence that suggests that the minimum productivity level is lower in more demand dense markets. We do not find evidence suggesting that demand density has an effect on firm size.