User-Generated Content and Competing Firms’ Product Design

Young Kwark (), Jianqing Chen () and Srinivasan Raghunathan ()
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Young Kwark: Warrington College of Business, 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

Management Science, 2018, vol. 64, issue 10, 4608-4628

Abstract: Firms employ various techniques to obtain information about consumer taste/location and valuation prior to making product design decisions. User-generated content has become an important information source. The vast variety and volume of user-generated content makes firms better informed about consumers ( precision-improving effect ), and the common and public nature of user-generated content makes firms’ information more correlated ( correlation-increasing effect ). We examine the impact of user-generated content in a setting in which two competing firms that are uncertain about consumer location or valuation design and sell horizontally differentiated products. We find that user-generated content has very different implications for competing firms’ location decisions and quality decisions. When firms are uncertain about consumer taste and choose their product locations, whether firms and/or consumers benefit from the user-generated content depends on which of the two effects dominates. We find that only when the correlation-increasing effect is moderate, a win–win scenario for both firms and consumers occurs, but the society always benefits from user-generated content. Stronger consumer preference strengthens the overall impact of user-generated content. In sharp contrast, when firms face uncertain consumer valuation of quality and choose product quality, they do not benefit from user-generated content, but consumers may benefit or lose from it. When the correlation-increasing effect is significant, both firms and consumers, and therefore the society, are hurt by user-generated content. Stronger consumer preference mitigates the negative impact but amplifies the positive impact of user-generated content in this case.

Keywords: user-generated content; product design; competition (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (6)

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