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
Date Written: January 16, 2010
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: Suggested Citation