A Dynamic Structural Model of Endogenous Consumer Reviews in Durable Goods Markets

50 Pages Posted: 17 Apr 2019

See all articles by Masakazu Ishihara

Masakazu Ishihara

New York University (NYU) - Leonard N. Stern School of Business

Yuzhou Liu

New York University (NYU) - Leonard N. Stern School of Business

Date Written: January 31, 2017

Abstract

Consumers commonly seek information from critic and consumer reviews when new product quality remains uncertain. However, consumer reviews are endogenous and may be subject to potential biases (e.g., self-selection). In this paper, we propose a new dynamic structural model where forward-looking consumers learn about quality from review ratings, make purchase decisions, and report consumer ratings post-purchase. In particular, the review-reporting component links unobserved heterogeneity in product valuation with consumer ratings, and allows us to examine the effect of pre-purchase quality beliefs on reported ratings. We apply the model to the US video game market. Our data consist of aggregate-level preorder sales, post-release monthly sales and prices, and individual-level critic and consumer ratings for 31 games released on SONY PlayStation 3. The preorder sales help identify the causal effect of review ratings on sales. Using the estimates, we quantify the effect of a price promotion during the preorder period. We demonstrate that if we ignore the endogeneity of consumer reviews, the effect of the price promotion can be over-estimated. This is because the price promotion attracts less enthusiastic consumers, which lowers the average consumer ratings subsequently. We further quantify the contributions of critic and consumer reviews to firms' profits.

Keywords: Critic and Consumer Reviews, Preorder, Bayesian Learning, Discrete Choice Dynamic Programming Models, Bayesian Estimation, Video Games

JEL Classification: C11, C35, D83, D91, L82, L86, M31

Suggested Citation

Ishihara, Masakazu and Liu, Yuzhou, A Dynamic Structural Model of Endogenous Consumer Reviews in Durable Goods Markets (January 31, 2017). Available at SSRN: https://ssrn.com/abstract=2728524 or http://dx.doi.org/10.2139/ssrn.2728524

Masakazu Ishihara

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Yuzhou Liu (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States

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