The effect of online reviews' information on quality and pricing decisions

Abstract

Consumers often rely on the peer reviews to make smart purchase decisions in the face of new experience products. Such information is also available to firms, which can help them learn about consumers' purchase intention and hence better deal with the tripartite price–quality–demand relationship. In this study, we develop a two‐period model to examine the impact of online reviews on product quality and price decisions. The market is characterized by the two‐dimensional heterogeneity of customer valuation and their willingness to pay for quality. Interestingly, we find that the informativeness of reviews plays different roles in firm–consumer interactions depending on the market's average willingness to pay (AWTP). Such informativeness exerts an information value‐added on both the firm and consumers in a high‐AWTP market and a negative impact in a low‐AWTP market. These two effects respectively induce consumers to purchase more in the high‐AWTP market while expel consumers from the market in the low‐AWTP market. We also compare the price path and quality level under commitment pricing and dynamic pricing both with and without informativeness, the results of which show that the information inducing effect changes the marketing strategies for new products. Furthermore, we present the conditions on which the firm should strive to disclose its quality information and explore the difference of firms' decisions in monopoly and competitive market.