Chasing Stars: Firms' Strategic Responses to Online Consumer Ratings

61 Pages Posted: 9 Apr 2020 Last revised: 16 Feb 2021

See all articles by Megan Hunter

Megan Hunter

Boston College - Carroll School of Management

Date Written: December 20, 2020

Abstract

In this paper, I show that a common way that platforms display firms' quality ratings incentivize firms to strategically take costly short-run actions that improve their ratings. Most review platforms display star ratings of goods and services rounded to a half star, rather than display the exact average rating. Since the true average rating is not shown, firms have an incentive to remain just above the rounding threshold in order to have a higher displayed rating. However, once a firm's rating passes the rounding threshold, the incentive to improve the ratings drops as their rating moves farther from the threshold. I study this phenomena in the context of auto repair. I find that there is an excessive amount of bunching around ratings thresholds. The firms' actions toward improving their ratings are typically unobserved, but due to my novel data and the discontinuity of displayed ratings, I can model and infer firm behavior. Specifically, I provide evidence that firms change the services they provide and exert extra effort when they are close to rounding thresholds. Finally, I provide a theoretical framework in order to quantify the actions and provide optimal policies for firm actions depending on their rating and number of reviews in a variety of counterfactual settings.

Keywords: consumer reviews, word of mouth, quantitative marketing, online reviews, firm strategy

Suggested Citation

Hunter, Megan, Chasing Stars: Firms' Strategic Responses to Online Consumer Ratings (December 20, 2020). Available at SSRN: https://ssrn.com/abstract=3554390 or http://dx.doi.org/10.2139/ssrn.3554390

Megan Hunter (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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