I Hear You: Does Quality Improve with Customer Voice?

Abstract

In a static quality context, online reviews and ratings help consumers separate high- and low-quality firms. In a dynamic quality context, however, reviews can inform and incentivize low-rated firms to improve their quality and lower the quality gap with high-rated firms. In this paper, we empirically test this hypothesis by analyzing the U.S. hotel industry using data from two major online consumer review platforms: Tripadvisor and Expedia. Using a combination of econometric and natural language processing tools, we present the following findings. First, hotels that are more likely to pay attention to reviews increase their ratings more than hotels that are less likely to pay attention to reviews. Second, these hotels increase their ratings by improving on issues frequently mentioned in their reviews. Third, we find that low-rated hotels experience larger gains in ratings as they have more margin for improvement than high-rated hotels. Overall, our results suggest that online reviews are a valuable source of information for firms and may improve consumer welfare.

Keywords: Online reviews, Reputation management, TripAdvisor, Expedia, Hotel industry, Sentiment analysis, Sentence embeddings