Designing product upgrades in the presence of online consumer reviews

Abstract

When consumers decide whether to buy an experience good, they usually search for online reviews to reduce quality uncertainty. In this paper, we consider that consumers may strategically wait for the new generation product and consult reviews of the previous generation product in the same series while facing sequential launching products. We develop a two‐period analytical model analyzing how the presence of intergenerational reviews influences the firm's decision on product upgrades. Our analysis obtains three main findings. First, when online reviews are less efficient and consumers are more strategic, the firm should skip the old product due to the severe product cannibalization effect. Second, negative reviews discourage the firm from quality improvement, and positive reviews drive the firm to provide quality improvement at a high price. Third, the firm chooses a decreasing price path without online reviews. However, an increasing price path is preferred in the presence of online reviews when online reviews are positive, the efficiency of consumer reviews is high, and consumers are more strategic. Our study indicates that online reviews have important influence on product generation design, and the firm should carefully evaluate online reviews of the old product when designing its new generation product.