How Unequal Perceptions of User Reviews Impact Price Competition

How Unequal Perceptions of User Reviews Impact Price Competition. By Pelin Pekgün, Michael Galbreth & Bikram Ghosh
Decision Sciences, http://onlinelibrary.wiley.com/doi/10.1111/deci.12273/abstract

Abstract: When a consumer cannot fully assess her valuations of competing products prior to purchase, she must make a purchase decision based on imperfect product information. However, with the advent of online channels for widely disseminating individual user reviews, consumers are now able to learn from the experiences of others and update their expectations regarding product valuations. We analyze the interaction of user reviews and experience uncertainty, with a specific focus on the potential for negative and positive reviews to be weighted differently in a consumer's assessment of the valence of the posted reviews. We find that overweighting of negative reviews by consumers can lead to surprising results in terms of pricing and profits in a competitive context. In particular, if consumer awareness is higher for the lower quality product, it can charge higher prices and realize higher profits in equilibrium than its higher quality competitor when consumers are strongly influenced by negative reviews. We also show that a higher weighting on positive reviews by consumers always helps the firm with a lower consumer awareness.