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User-Generated Content and Competing Firms’ Product Design

Author

Listed:
  • Young Kwark

    (Warrington College of Business, University of Florida, Gainesville, Florida 32611)

  • Jianqing Chen

    (Jindal School of Management, The University of Texas at Dallas, Richardson, Texas 75080)

  • Srinivasan Raghunathan

    (Jindal School of Management, The University of Texas at Dallas, Richardson, Texas 75080)

Abstract

Firms employ various techniques to obtain information about consumer taste/location and valuation prior to making product design decisions. User-generated content has become an important information source. The vast variety and volume of user-generated content makes firms better informed about consumers ( precision-improving effect ), and the common and public nature of user-generated content makes firms’ information more correlated ( correlation-increasing effect ). We examine the impact of user-generated content in a setting in which two competing firms that are uncertain about consumer location or valuation design and sell horizontally differentiated products. We find that user-generated content has very different implications for competing firms’ location decisions and quality decisions. When firms are uncertain about consumer taste and choose their product locations, whether firms and/or consumers benefit from the user-generated content depends on which of the two effects dominates. We find that only when the correlation-increasing effect is moderate, a win–win scenario for both firms and consumers occurs, but the society always benefits from user-generated content. Stronger consumer preference strengthens the overall impact of user-generated content. In sharp contrast, when firms face uncertain consumer valuation of quality and choose product quality, they do not benefit from user-generated content, but consumers may benefit or lose from it. When the correlation-increasing effect is significant, both firms and consumers, and therefore the society, are hurt by user-generated content. Stronger consumer preference mitigates the negative impact but amplifies the positive impact of user-generated content in this case.

Suggested Citation

  • Young Kwark & Jianqing Chen & Srinivasan Raghunathan, 2018. "User-Generated Content and Competing Firms’ Product Design," Management Science, INFORMS, vol. 64(10), pages 4608-4628, October.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:10:p:4608-4628
    DOI: 10.287/mnsc.2017.2839
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