Decomposing the Variance of Consumer Ratings and the Impact on Price and Demand

Information Systems Research, 29(4), December 2018, 984-1002

44 Pages Posted: 28 Nov 2017 Last revised: 21 Apr 2020

See all articles by Steffen Zimmermann

Steffen Zimmermann

University of Innsbruck

Philipp Herrmann

Independent

Dennis Kundisch

Business Information Systems, esp.. Digital Markets

Barrie R. Nault

University of Calgary - Haskayne School of Business

Date Written: November 23, 2017

Abstract

Consumer ratings play a decisive role in purchases by online shoppers. Although the effect of the average and the number of consumer ratings on future product pricing and demand have been studied with some conclusive results, the effects of the variance of these ratings are less well understood. We develop a model where we decompose the variance of consumer ratings in two sources: taste differences about search and experience attributes of a durable good, and quality differences among instances of this good in the form of product failure. We find that (i) optimal price increases and demand decreases in variance caused by taste differences, (ii) optimal price and demand decrease in variance caused by quality differences, and (iii) when holding the average rating as well as the total variance constant, for products with low total variance both price and demand increase in the relative share of variance caused by taste differences. Counter to intuition, we demonstrate that risk averse consumers may prefer a higher priced product with a higher variance in ratings when deciding between two similar products with the same average rating.

Keywords: Consumer rating; variance; taste differences; quality differences; e-commerce

Suggested Citation

Zimmermann, Steffen and Herrmann, Philipp and Kundisch, Dennis and Nault, Barrie R., Decomposing the Variance of Consumer Ratings and the Impact on Price and Demand (November 23, 2017). Information Systems Research, 29(4), December 2018, 984-1002. Available at SSRN: https://ssrn.com/abstract=3076362

Steffen Zimmermann

University of Innsbruck ( email )

Universitaetsstr. 15
Innsbruck, A-6020
Austria

Philipp Herrmann

Independent ( email )

No Address Available
United States

Dennis Kundisch (Contact Author)

Business Information Systems, esp.. Digital Markets ( email )

Warburger Str. 100
D-33098 Paderborn
Germany

Barrie R. Nault

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

HOME PAGE: http://ucalgary.ca/bnault

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