Do Online Reviews Improve Product Quality? Evidence from Hotel Reviews on Travel Sites.

Abstract

In this study, we demonstrate empirical evidence supporting the game theoretic argument that the presence of online reviews can curtail branded firms' quality advantage over independent firms due to signaling in experience good markets. Exploiting heterogeneous review platform penetration rates across markets in a dataset covering 89% of U.S. hotels, we show that markets with greater platform penetration exhibit greater gains in independent hotel quality. Independent hotels located in median peak penetration platform-defined markets improved their quality by an average of .129 stars as measured using composite online travel agent (OTA) star ratings, eroding 41% of the advantage held by chains in the absence of online reviews. We address measurement noise challenges for hotel quality and platform penetration using state space models to reveal latent quality and platform penetration trends. Additionally, we resolve endogeneity due to contemporaneous confounds by exploiting review platforms' imperfect market definitions that divide areas of hotel agglomeration into separate review platform markets that quasi-exogenously assign hotels to different levels of exposure to online reviews. Our research suggests that online review platforms play an important role in facilitating competition on quality.

Keywords: online reviews, product quality, hotel markets, geographic clustering

JEL Classification: M31, M3, M21, M1, L83