Effects of online reviews and competition on quality and pricing strategies

Cui Zhao · Xiaojun Wang · Yongbo Xiao · Jie Sheng

74 citations0/0 files storedProduction and Operations Management

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Supply Chain and Inventory Management Merger and Competition Analysis Consumer Market Behavior and Pricing

Abstract

By providing useful product information from the perspective of other buyers, online product/service reviews can help customers better evaluate the true quality of products and judge whether a product is a good fit for them. Based on online reviews, firms may improve product quality and/or adjust selling price to compete with other firms. In this study, we investigate the effects of online reviews on product quality and pricing decisions in a duopoly market that consists of two competing firms. Specifically, we consider a stylized two‐period model and study the equilibrium decisions based on a Nash game framework. In the base scenario, the selling prices are exogenously given, and the firms decide on the product quality across two periods to optimize their respective profits. We study the equilibrium decisions in the static setting (in which the product quality remains the same across the two periods) and in the dynamic setting (in which the product quality can be improved in the second period), respectively. In the extended scenario, the selling prices can be endogenously determined as well. For each scenario, we compare the equilibrium decisions under dynamic competition with those under static competition through theoretical analysis and numerical experiments, which uncover some interesting managerial insights regarding the impact of online reviews under competition.

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References

1969The Combination of Forecasts 2008Online Consumer Review: Word-of-Mouth as a New Element of Marketing Communication Mix 2011Deriving the Pricing Power of Product Features by Mining Consumer Reviews 2006Promotional Chat on the Internet 2011The Role of Marketing in Social Media: How Online Consumer Reviews Evolve 2012Online Product Reviews: Implications for Retailers and Competing Manufacturers 2005Third-Party Product Review and Firm Marketing Strategy 2007A Dynamic Model of Brand Choice When Price and Advertising Signal Product Quality

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