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

36 Pages Posted: 3 Sep 2018 Last revised: 9 Feb 2020

See all articles by Yang Wang

Yang Wang

Temple University

Alexander Chaudhry

Texas Tech University - Area of Marketing

Amit Pazgal

Rice University

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2019

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

Suggested Citation

Wang, Yang and Chaudhry, Alexander and Pazgal, Amit I., Do Online Reviews Improve Product Quality? Evidence from Hotel Reviews on Travel Sites. (January 22, 2019). Available at SSRN: https://ssrn.com/abstract=3238510 or http://dx.doi.org/10.2139/ssrn.3238510

Yang Wang (Contact Author)

Temple University ( email )

Philadelphia, PA 19122
United States

Alexander Chaudhry

Texas Tech University - Area of Marketing ( email )

United States

Amit I. Pazgal

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

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