Understanding the Impact of Reviews on Consumer Product Choices under Negotiated Pricing
58 Pages Posted: 25 Aug 2020 Last revised: 24 Aug 2023
Date Written: August 14, 2020
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: Suggested Citation