Selected Journal Publications

17.01.2020

The Impact of Product Reviews on Consumers and Firms

Strategic Waiting for Consumer-Generated Quality Information: Dynamic Pricing of New Experience Goods
DEBO, Laurens | KAPUSCINSKI, Roman | YU, Man
Management Science, 62(2), 410-435

Before deciding to purchase a product, a consumer can access information via consumer reviews by customers who have already purchased the product. Consumer reviews are a form of customer feedback, but this information can also benefit firms. However, consumer-generated quality information (consumer reviews) relies on the volume of consumers who share their opinions and feedback, which in fact depends on initial sales volume. As a result, with an initial price, firms can influence their revenue while also controlling the quality of information flow over time. In essence, firms can either enhance or dampen the flow of quality information by increasing or decreasing their initial sales.

A study by Man Yu, Laurens Debo, and Roman Kapuscinski found that firms may find themselves in a worse situation due to consumer-generated quality information. The researchers explain, “even when the firm benefits from consumer-generated quality information, it may prefer less accurate information”. Consumer surplus can also decrease as a result of consumer-generated quality information, which is contrary to the common belief that word of mouth benefits customers.

In their study, the researchers focused on the dynamic pricing of new experience goods. The quality of such goods is not easily assessed ex ante (based on forecasts rather than actual results) by firms or consumers. Some examples of new experience goods include movies, books, or newly launched electronics.

Information generated through reviews allow consumers to assess products and time their purchasing decisions. However, this information is also relevant to firms, as they can determine the quality of their product via consumer experiences\. With this information, firms can have a better pricing strategy, leading to increased profits.

As a consequence, reviews influence the interactions between firms and consumers, as quality information generated by certain consumers impacts behaviour on both sides over time. For instance, some consumers may delay their purchase in anticipation of a price decrease, delaying the firm’s revenue. In response, firms may adjust their pricing strategy to prevent such consumers from waiting for the price to drop or quality information to become available.

The researchers explain, “...no paper [has] studied the impact of both waiting incentives (for a price decrease and for consumer generated quality information) on the firm and consumer behaviour jointly”. More specifically, it is unclear how a firm could leverage endogenously generated quality information, and how it should adjust its pricing strategy – especially when taking into account strategic customers.

The researchers investigated whether endogenously generated quality information would hurt or enhance a firm’s profits and consumer surplus. They also determined whether reviews provide an incentive for firms to increase or decrease their initial price, and anticipating this strategy, whether more or less consumers would strategically delay their purchase compared to a no-review situation. To test this, the researchers used “a dynamic pricing model where the consumers’ valuations for a product depend on both the product’s quality and consumers’ private valuation”. 

The study found that although a larger volume of consumer reports generates more informative reviews, firms may be better off by decelerating social learning by decreasing initial sales, compared to a no-review scenario. Second, although firms can learn from consumer reviews, they might suffer from review information driven by strategic consumer behaviour. Third, contrary to word of mouth not harming consumers, the research revealed that consumers may end up with lower aggregate surplus due to other reviews. Finally, the proportion of population and the number of people that read or write reviews has a significant impact on a firm’s option value and optimal pricing change.

The researchers explain, “the fundamental difference between the firm’s and consumer’s option value implies that the characteristics of consumers and of the firm determine the impact of consumer reviews on initial sales, the firm’s profit, and consumer surplus”. They further add that managers should also consider relative patience level and confidence levels that consumers attach to reviews, such as the precisions of information.


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