An Economic Analysis of Online Product Reviews and Ratings

34 Pages Posted: 22 Oct 2007 Last revised: 16 Feb 2016

See all articles by Baojun Jiang

Baojun Jiang

Washington University in Saint Louis - John M. Olin Business School

Pei-Yu Chen

Arizona State University (ASU) - Department of Information Systems

Date Written: October 1, 2007

Abstract

Many online vendors and third-party firms provide consumers with easy-to-use systems to give product reviews and ratings. Availability of online reviews and ratings may significantly influence a vendor's strategies in terms of pricing and market segmentation. Consumers as well as vendors can potentially benefit or lose from such availability though it is unclear whether the net effect to each party is positive, or who gains or loses most. This paper provides an analytical model to study the impacts of online product review and rating systems on vendor marketing strategies, consumer surplus and social welfare. We also examine the effects of both product-level and vendor-level competition on the impact of online reviews and ratings. We find that consumer surplus, vendor profitability, and social welfare can improve with the availability of consumer reviews and ratings, and that vendors may have an incentive to induce higher product ratings by under-charging in earlier periods. Interestingly, we show that, contrary to the conventional wisdom about competition, with the availability of consumer reviews, consumer surplus and social welfare can in fact be higher in a monopolist market than in a duopolistic market.

Keywords: consumer reviews, online rating, online word-of-mouth

Suggested Citation

Jiang, Baojun and Chen, Pei-Yu, An Economic Analysis of Online Product Reviews and Ratings (October 1, 2007). Available at SSRN: https://ssrn.com/abstract=1023302 or http://dx.doi.org/10.2139/ssrn.1023302

Baojun Jiang (Contact Author)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States
3149353315 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/Jiang/

Pei-Yu Chen

Arizona State University (ASU) - Department of Information Systems ( email )

Tempe, AZ
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
698
Abstract Views
2,860
rank
35,569
PlumX Metrics