How Unequal Perceptions of User Reviews Impact Price Competition

Decision Sciences, Forthcoming

36 Pages Posted: 30 Mar 2017

See all articles by Pelin Pekgun

Pelin Pekgun

University of South Carolina - Department of Management Science

Michael Galbreth

University of Tennessee, Knoxville - Haslam College of Business

Bikram Ghosh

University of South Carolina

Date Written: March 27, 2017

Abstract

When a consumer cannot fully assess her valuations of competing products prior to purchase, she must make a purchase decision based on imperfect product information. However, with the advent of online channels for widely disseminating individual user reviews, consumers are now able to learn from the experiences of others and update their expectations regarding product valuations. We analyze the interaction of user reviews and experience uncertainty, with a specific focus on the potential for negative and positive reviews to be weighted differently in a consumer's assessment of the valence of the posted reviews. We find that overweighting of negative reviews by consumers can lead to surprising results in terms of pricing and profits in a competitive context. In particular, if consumer awareness is higher for the lower quality product, it can charge higher prices and realize higher profits in equilibrium than its higher quality competitor when consumers are strongly influenced by negative reviews. We also show that a higher weighting on positive reviews by consumers always helps the firm with a lower consumer awareness.

Keywords: user reviews, experience uncertainty, competition, pricing

Suggested Citation

Pekgun, Pelin and Galbreth, Michael and Ghosh, Bikram, How Unequal Perceptions of User Reviews Impact Price Competition (March 27, 2017). Decision Sciences, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2943527

Pelin Pekgun (Contact Author)

University of South Carolina - Department of Management Science ( email )

United States

Michael Galbreth

University of Tennessee, Knoxville - Haslam College of Business ( email )

453 Haslam Business Building
Knoxville, TN 37996-4140
United States

Bikram Ghosh

University of South Carolina ( email )

701 Main Street
Columbia, SC 29208
United States

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