The Race for Online Reputation: Implications for Platforms, Firms and Consumers

45 Pages Posted: 19 Apr 2019

See all articles by Mingwen Yang

Mingwen Yang

University of Washington

Eric Zheng

University of Texas at Dallas

Vijay Mookerjee

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: March 8, 2019

Abstract

Online reputation (reflected in consumer ratings) has become a key marketing-mix variable in the digital world. We consider a market consisting of competing firms that participate in a platform such as Expedia or Yelp. Each firm exerts effort to improve its ratings, but in doing so, also influences the mean market rating. The sales of a firm are influenced by its own ratings and the mean rating of the firms in the market. An equilibrium analysis of the mean market rating reveals several insights. A more heterogeneous market (one where the parameters of the firms are very different) leads to a lower mean market rating and higher total profit of the firms in the market. Our results can inform platforms to target certain firms to join: Growing the middle of the market (firms with average ratings) is the best option considering the goals of the platform (increase total profit of the firms) and the other stakeholders, namely, incumbents and consumers. For firms, we find that a firm's profit can increase from an adverse event (such as, a reduction in sales margin, or an increase in the cost of control) depending on how other firms in the market are affected by the event. Our findings are particularly significant for platform owners who could benefit from growing the platform in a strategic manner. We model each firm's decision problem as a stochastic control problem where the objective is to maximize discounted profit over a planning horizon. These control problems are connected through a common market belief that represents the mean rating of the firms in the market. The joint actions of the firms generate a mean market equilibrium. We prove that such an equilibrium exists, is unique, and use a simple algorithm to compute its value.

Keywords: Online Reputation, Competition, Equilibrium, Controlled Diffusion Processes

JEL Classification: M

Suggested Citation

Yang, Mingwen and Zheng, Eric and Mookerjee, Vijay, The Race for Online Reputation: Implications for Platforms, Firms and Consumers (March 8, 2019). Available at SSRN: https://ssrn.com/abstract=3349476 or http://dx.doi.org/10.2139/ssrn.3349476

Mingwen Yang (Contact Author)

University of Washington ( email )

UW Foster School of Business ISOM Department
Box 353226
Seattle, WA 98195
United States
4049332608 (Phone)

Eric Zheng

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Vijay Mookerjee

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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