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Online Product Reviews-Triggered Dynamic Pricing: Theory and Evidence

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  • Juan Feng

    (Department of Information Systems, College of Business, City University of Hong Kong, Kowloon, Hong Kong)

  • Xin Li

    (Department of Information Systems, College of Business, City University of Hong Kong, Kowloon, Hong Kong)

  • Xiaoquan (Michael) Zhang

    (Department of Decision Sciences and Managerial Economics, Business School, Chinese University of Hong Kong, New Territories, Hong Kong)

Abstract

Prior works offer compelling evidence that, on the demand side of the market, user-generated online product reviews play a very important role in informing consumers’ purchase decisions. On the supply side, however, the interplay between online product reviews and firm strategies is less understood. We build an analytical model that differentiates products based on consumers’ preference for tastes (horizontal differentiation) or quality (vertical differentiation) and show that a firm is able to not only manipulate its pricing to influence online product reviews (thus influencing sales) but also, adjust pricing dynamically in response to online word of mouth. Our model derives rich and testable results on possible price trajectories. To offer empirical support for the analytical predictions, we conduct a panel data study of prices and reviews. We adopt a difference-in-differences framework to address endogeneity challenges.

Suggested Citation

  • Juan Feng & Xin Li & Xiaoquan (Michael) Zhang, 2019. "Online Product Reviews-Triggered Dynamic Pricing: Theory and Evidence," Information Systems Research, INFORMS, vol. 30(4), pages 1107-1123, December.
    • Handle: RePEc:inm:orisre:v:30:y:2019:i:4:p:1107-1123
    DOI: 10.1287/isre.2019.0852
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    5. Yang, Wenjuan & Zhang, Jiantong & Yan, Hong, 2022. "Promotions of online reviews from a channel perspective," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 161(C).
    6. Dipankar Das, 2023. "A Model of Competitive Assortment Planning Algorithm," Papers 2307.09479, arXiv.org.
    7. Jürgen Neumann, 2021. "When Biased Ratings Benefit the Consumer - An Economic Analysis of Online Ratings in Markets with Variety-Seeking Consumers," Working Papers Dissertations 77, Paderborn University, Faculty of Business Administration and Economics.
    8. Cui Zhao & Xiaoshuai Peng & Zhendong Li, 2023. "The influence of online customer reviews on two-stage product strategy in a competitive market," Annals of Operations Research, Springer, vol. 326(1), pages 411-503, July.
    9. Ji Wu & Haichuan Zhao & Haipeng (Allan) Chen, 2021. "Coupons or Free Shipping? Effects of Price Promotion Strategies on Online Review Ratings," Information Systems Research, INFORMS, vol. 32(2), pages 633-652, June.
    10. Tao Lu & May Yuan & Chong (Alex) Wang & Xiaoquan (Michael) Zhang, 2022. "Histogram Distortion Bias in Consumer Choices," Management Science, INFORMS, vol. 68(12), pages 8963-8978, December.
    11. Uttara Ananthakrishnan & Davide Proserpio & Siddhartha Sharma, 2023. "I Hear You: Does Quality Improve with Customer Voice?," Marketing Science, INFORMS, vol. 42(6), pages 1143-1161, November.
    12. Duan, Yongrui & Liu, Tonghui & Mao, Zhixin, 2022. "How online reviews and coupons affect sales and pricing: An empirical study based on e-commerce platform," Journal of Retailing and Consumer Services, Elsevier, vol. 65(C).
    13. Bikram P. Ghosh & Michael R. Galbreth, 2023. "The weight of the crowd, social information credibility, and firm strategy," Production and Operations Management, Production and Operations Management Society, vol. 32(4), pages 1079-1095, April.
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    15. Fan, Huirong & Khouja, Moutaz & Gao, Jie & Zhou, Jing, 2023. "Incorporating social learning into the optimal return and pricing decisions of online retailers," Omega, Elsevier, vol. 118(C).
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    17. Young Kwark & Gene Moo Lee & Paul A. Pavlou & Liangfei Qiu, 2021. "On the Spillover Effects of Online Product Reviews on Purchases: Evidence from Clickstream Data," Information Systems Research, INFORMS, vol. 32(3), pages 895-913, September.
    18. Gu, Wei & Luo, Jing & Yu, Xiaoru & Zhang, Wenqing & Li, Baixun, 2023. "Dynamic decisions between sellers and consumers in online second-hand trading platforms: Evidence from C2C transactions," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 177(C).
    19. Ming-Hui Huang & Roland T. Rust, 2021. "A strategic framework for artificial intelligence in marketing," Journal of the Academy of Marketing Science, Springer, vol. 49(1), pages 30-50, January.
    20. Ina Garnefeld & Sabrina Helm & Ann-Kathrin Grötschel, 2020. "May we buy your love? psychological effects of incentives on writing likelihood and valence of online product reviews," Electronic Markets, Springer;IIM University of St. Gallen, vol. 30(4), pages 805-820, December.

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