Online Product Reviews: Implications for Retailers and Competing Manufacturers

Young Kwark (), Jianqing Chen () and Srinivasan Raghunathan ()
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Young Kwark: Warrington College of Business Administration, University of Florida, Gainesville, Florida 32611
Jianqing Chen: Jindal School of Management, The University of Texas at Dallas, Richardson, Texas 75080
Srinivasan Raghunathan: Jindal School of Management, The University of Texas at Dallas, Richardson, Texas 75080

Information Systems Research, 2014, vol. 25, issue 1, 93-110

Abstract: This paper studies the effect of online product reviews on different players in a channel structure. We consider a retailer selling two substitutable products produced by different manufacturers, and the products differ in both their qualities and fits to consumers' needs. Online product reviews provide additional information for consumers to mitigate the uncertainty about the quality of a product and about its fit to consumers' needs. We show that the effect of reviews on the upstream competition between the manufacturers is critical in understanding which firms gain and which firms lose. The upstream competition is affected in fundamentally different ways by quality information and fit information, and each information type has different implications for the retailer and manufacturers. Quality information homogenizes consumers' perceived utility differences between the two products and increases the upstream competition, which benefits the retailer but hurts the manufacturers. Fit information heterogenizes consumers' estimated fits to the products and softens the upstream competition, which hurts the retailer but benefits the manufacturers. Furthermore, reviews may also alter the nature of upstream competition from one in which consumers' own assessment on the quality dimension plays a dominant role in consumers' comparative evaluation of products to one in which fit dimension plays a dominant role. If manufacturers do not respond strategically to reviews and keep the same wholesale prices regardless of reviews (i.e., the upstream competition is assumed to be unaffected by reviews), then, we show that reviews never hurt the retailer and the manufacturer with favorable reviews, and never benefit the manufacturer with unfavorable reviews, a finding that demonstrates why reviews' effect on upstream competition is critical for firms in online marketplaces.

Keywords: online product reviews; competition; electronic commerce; analytical modeling; economics of IS (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (119)

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