Finance Papers

Document Type

Journal Article

Date of this Version

2011

Publication Source

Journal of Management Information Systems

Volume

27

Issue

4

Start Page

9

Last Page

42

DOI

10.2753/MIS0742-1222270401

Abstract

This paper examines how information provided by online reviews influences firms' pricing strategy for repeat purchase products. It is commonly understood that online reviews can reduce consumer uncertainty about product characteristics and, therefore, have the potential to increase product demand and firm profits. However, when considering repeat purchase products, online reviews have an additional effect in that they can alter consumers' propensity to switch among products, which can intensify price competition and lead to lower profits. The strength of these potentially offsetting effects depends on the informativeness of consumer reviews, which is a function of both objective review accuracy and the ability of consumers to obtain information from reviews when their idiosyncratic preferences over product characteristics might differ from the preferences of reviewers. The interplay of these competing effects results in an S-shaped relationship between the quality of reviews and firm profits. There exists an optimal level of consumer informedness from the firms' perspective, and competing firms may have incentives to facilitate consumer reviews in some markets but not in others. Given firms' strategic pricing, consumers may also be worse off as review informativeness increases.

Copyright/Permission Statement

This is an Accepted Manuscript of an article published by Taylor & Francis in Journal of Management Information Systems on 2011, available online: http://wwww.tandfonline.com/10.2753/MIS0742-1222270401

Keywords

game-theoretic model, installed customer base, online product reviews, price competition, repeat purchase products, review informativeness

Embargo Date

6-8-2016

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Date Posted: 27 November 2017

This document has been peer reviewed.