Product Reviews and Competition in Markets for Repeat Purchase Products

Journal of Management Information Systems, Vol. 27, No. 4, pp. 9-42, 2011

41 Pages Posted: 3 Dec 2008 Last revised: 23 Feb 2012

Xinxin Li

University of Connecticut - School of Business

Lorin M. Hitt

University of Pennsylvania - Operations & Information Management Department

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing

Date Written: January 16, 2010

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.

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

Suggested Citation

Li, Xinxin and Hitt, Lorin M. and Zhang, Z. John, Product Reviews and Competition in Markets for Repeat Purchase Products (January 16, 2010). Journal of Management Information Systems, Vol. 27, No. 4, pp. 9-42, 2011. Available at SSRN: https://ssrn.com/abstract=1309967

Xinxin Li (Contact Author)

University of Connecticut - School of Business ( email )

2100 Hillside Road
Storrs, CT 06269
United States
(860) 486-3062 (Phone)

Lorin M. Hitt

University of Pennsylvania - Operations & Information Management Department ( email )

571 Jon M. Huntsman Hall
Philadelphia, PA 19104
United States
215-898-7730 (Phone)
215-898-3664 (Fax)

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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