Customer Review Provision Policies with Heterogeneous Cluster Preferences

Abstract

Companies often post user-generated reviews online so that potential buyers in different clusters (age, geographic region, occupation, etc.) can learn from existing customers about the quality of an experience good and cluster preferences before purchasing. In this paper, we evaluate two common user-generated review provision policies for selling experience goods to customers in different clusters with heterogeneous preferences. The first policy is called the Association-based policy (AP) under which a customer in a cluster can only observe the aggregate review (i.e., average rating) generated by users within the same cluster. The second policy is called the Global-based policy (GP) under which each customer is presented with the aggregate review generated by all users across clusters. We find that, in general, the firm benefits from a policy that provides a larger number of ``relevant reviews'' to customers. When customers are more certain about the product quality and when product preferences are more diverse across clusters, AP is more profitable than GP because it provides cluster-specific reviews to customers. Otherwise, GP is more profitable as it provides a larger number of reviews, although less relevant, to customers. Moreover, we propose a third provision policy that imparts the union of the information by AP and GP and show that it is more profitable for the firm. While the third policy always renders a higher consumer welfare than GP, it may generate a lower consumer welfare than AP.

Keywords: user-generated reviews, review provision policy, heterogeneous clusters