How does the overweighting of negative reviews by consumers affect prices under competition?

What is it about?

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.

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Why is it important?

Due to the ease of sharing experiences online, user reviews are changing how people make choices between competing products. Purchase decisions can now be made based not only on a product’s objective attributes, but also on the wealth of experience information from prior users that is easily and freely accessible online. However, positive and negative reviews might not be regarded in the same way by consumers. We show in this paper that this unequal weighting of reviews has an important effect on the competitive dynamics and profits of competing firms.