Product Reviews and Competition in Markets for Repeat Purchase Products

Abstract:     
This paper examines how information provided by online reviews influences firms’ pricing strategy for repeat purchase products. It is commonly understood that online reviews can reduce consumer uncertainty about product characteristics and, therefore, have the potential to increase product demand and firm profits. However, when considering repeat purchase products, online reviews have an additional effect that they alter consumers’ propensity to switch among products which can intensify price competition and lead to lower profits. The strength of these potentially offsetting effects depends on the informativeness of consumer reviews, which is a function of both objective review accuracy and the ability of consumers to obtain information from reviews when their idiosyncratic preferences over product characteristics might differ from the preferences of reviewers. The interplay of these competing effects results in an “S-shaped” relationship between the quality of reviews and firm profits. There exists an optimal level of consumer informedness from the firms’ perspective and competing firms may have incentives to facilitate consumer reviews in some markets but not in others.

Number of Pages in PDF File: 41

Keywords: online product reviews, review informativeness, repeat purchase products, installed customer base, price competition, game theoretic model

JEL Classification: D40, D80, L11, L15, L86, M31

Accepted Paper Series