The Race for Online Reputation: Implications for Platforms, Firms and Consumers

Abstract

Online reputation (reflected in consumer ratings) has become a key marketing-mix variable in the digital world. We consider a market consisting of competing firms that participate in a platform such as Expedia or Yelp. Each firm exerts effort to improve its ratings, but in doing so, also influences the mean market rating. The sales of a firm are influenced by its own ratings and the mean rating of the firms in the market. An equilibrium analysis of the mean market rating reveals several insights. A more heterogeneous market (one where the parameters of the firms are very different) leads to a lower mean market rating and higher total profit of the firms in the market. Our results can inform platforms to target certain firms to join: Growing the middle of the market (firms with average ratings) is the best option considering the goals of the platform (increase total profit of the firms) and the other stakeholders, namely, incumbents and consumers. For firms, we find that a firm's profit can increase from an adverse event (such as, a reduction in sales margin, or an increase in the cost of control) depending on how other firms in the market are affected by the event. Our findings are particularly significant for platform owners who could benefit from growing the platform in a strategic manner. We model each firm's decision problem as a stochastic control problem where the objective is to maximize discounted profit over a planning horizon. These control problems are connected through a common market belief that represents the mean rating of the firms in the market. The joint actions of the firms generate a mean market equilibrium. We prove that such an equilibrium exists, is unique, and use a simple algorithm to compute its value.

Keywords: Online Reputation, Competition, Equilibrium, Controlled Diffusion Processes

JEL Classification: M