Design of Consumer Review Systems and Product Pricing
AbstractConsumer review systems have become an important marketing communication tool through which consumers share and learn product information. Although there is abundant evidence that consumer reviews have significant impact on consumer purchasing decisions, the design of consumer review systems and its impact on review outcomes and product sales have not yet been well examined. This paper analyzes firms’ review system design and product pricing strategies. We formally model two design features of consumer review systems – rating scale and disclosure of specific product attribute information. We show that firms’ optimal strategies critically depend on contextual characteristics such as product quality, product popularity, and consumer misfit cost. Our results suggest that firms should choose a low rating scale for niche products and a high rating scale for popular products. Firms should disclose specific product attribute information to attract the desired consumer segment when product quality is low relative to misfit cost, and the resulting optimal size of the targeted consumer market increases in product popularity and product quality. Different pricing strategies should be deployed during the initial sale period for different product types. For niche products, firms are advised to adopt lower-bound pricing for high-quality products to take advantage of the positive word of mouth. For popular products, firms are advised to adopt upper-bound pricing for high-quality products to enjoy the direct profit from the initial sale period, even after taking into account the negative impact of high price on consumer reviews.
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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 12-10.
Length: 63 pages
Date of creation: Sep 2012
Date of revision:
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Web page: http://www.NETinst.org/
economic modeling; e-commerce; consumer reviews; online word of mouth; product uncertainty;
Find related papers by JEL classification:
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
- M15 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - IT Management
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-13 (All new papers)
- NEP-BEC-2012-10-13 (Business Economics)
- NEP-COM-2012-10-13 (Industrial Competition)
- NEP-IND-2012-10-13 (Industrial Organization)
- NEP-MKT-2012-10-13 (Marketing)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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