Understanding the Impact of Reviews on Consumer Product Choices under Negotiated Pricing

58 Pages Posted: 25 Aug 2020 Last revised: 24 Aug 2023

See all articles by Jisu Cao

Jisu Cao

Arizona State University

Sha Yang

University of Southern California - Marshall School of Business

Date Written: August 14, 2020

Abstract

We study the impact of reviews on product choices when consumers can negotiate price. Although prior research has examined the impact of reviews in various contexts, none has considered a setting in which the purchase price is negotiated. We postulate that online reviews affect demand through consumer baseline product preference as well as consumer bargaining power. Leveraging a unique data set of consumer reviews of new car purchases, we developed and estimated a structural model to decompose and quantify the two mechanisms of how reviews affect demand: baseline-preference mechanism vs. bargaining-power mechanism. Our counterfactual analysis suggests that the bargaining-power mechanism is more important than the baseline-preference mechanism in explaining how historical price and discount frequency information in reviews affect seller profits. Ignoring the impact of reviews on the negotiated price leads to a biased estimation of the effectiveness of reviews. We call into caution a popular selling practice of using discounts in exchange for positive reviews, as it can backfire when future consumers leverage this discount information to negotiate a lower price.

Keywords: price negotiation, online reviews, structural model

JEL Classification: M31, L81

Suggested Citation

Cao, Jisu and Yang, Sha, Understanding the Impact of Reviews on Consumer Product Choices under Negotiated Pricing (August 14, 2020). Available at SSRN: https://ssrn.com/abstract=3673657 or http://dx.doi.org/10.2139/ssrn.3673657

Jisu Cao (Contact Author)

Arizona State University ( email )

Tempe, AZ 85281
United States

Sha Yang

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
254
Abstract Views
979
Rank
220,594
PlumX Metrics