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Design of Consumer Review Systems and Product Pricing

Author

Listed:
  • Yabing Jiang

    () (Lutgert College of Business, Florida Gulf Coast University)

  • Hong Guo

    () (Mendoza College of Business, University of Notre Dame)

Abstract

Consumer 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.

Suggested Citation

  • Yabing Jiang & Hong Guo, 2012. "Design of Consumer Review Systems and Product Pricing," Working Papers 12-10, NET Institute.
  • Handle: RePEc:net:wpaper:1210
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    File URL: http://www.NETinst.org/Jiang_12-10.pdf
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    References listed on IDEAS

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    1. Chrysanthos Dellarocas, 2006. "Strategic Manipulation of Internet Opinion Forums: Implications for Consumers and Firms," Management Science, INFORMS, vol. 52(10), pages 1577-1593, October.
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    4. Nikolay Archak & Anindya Ghose & Panagiotis G. Ipeirotis, 2007. "Deriving the Pricing Power of Product Features by Mining Consumer Reviews," Working Papers 07-36, NET Institute.
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    More about this item

    Keywords

    economic modeling; e-commerce; consumer reviews; online word of mouth; product uncertainty;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • M15 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - IT Management

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