The Effect of Observing the Service Interaction of Peers: Empirical Evidence of the Pros and Cons to Responding to Online Customer Reviews

Abstract

The current research paradigm of social influence in customer satisfaction in the digital age focuses on peer effects in the expectation formation stage. We propose that the broad class of publicly observable service interactions can also have satisfaction externalities for customers who observe these interactions. We test the social influence of observable peer service interactions in the context of managers’ response to online reviews. At the time of writing her review, a focal customer has already purchased and experienced the product or service. Even so, managers can still influence focal customers post-consumption satisfaction through their responses to other customers’ reviews. Through a novel natural-experiment, we find empirical evidence using a dataset of more than 17 million hotel reviews that publicly stated satisfaction is positively (negatively) influenced by managers’ responses to negative (positive) reviews of previous customers. In addition, we apply latent Dirichlet allocation methods to model the tailoring of manager response to customer reviews. We find that response tailoring to negative (positive) reviews enhances (exacerbates) the positive (negative) effect on subsequent opinion.

Keywords: Online reviews, tailored firm engagement, customer satisfaction, natural experiment, topic modeling

JEL Classification: M3, M31