Do Online Reviews Matter? Towards an Understanding of the Effect of Online Reviews on a Hotel’s Profit and Strategic Channel Choice

Abstract

Following the online retailing trend, many hotels cooperate with Online Travel Agents (OTAs) to sell rooms. However, the present literature has not paid adequate attention to understanding the impact of online reviews, which is an important characteristic in the presence of the OTA channel, on a hotel’s choice of sales channel(s) problem. In this study, we incorporate the impacts of online reviews (for both their valence and perceived credibility) on updating consumers’ uncertain valuation of a hotel and, consequently, on that hotel’s sales channel choice (the hotel’s direct channel only, the OTA channel only, and a dual channel incorporating both). We derive that online reviews can have either beneficial or detrimental effects on the hotel’s profit and, thereby, have significant impacts on the hotel’s sales channel choice. The optimal sales channel choice depends on consumers’ updated uncertain valuation with online reviews, the hotel’s capacity, and the increased market size through the OTA. Interestingly, when incorporating the impacts of online reviews, a hotel can still be better off by selling rooms through an OTA even if doing so does not increase the market size, which is a novel result. The findings help the hotels with different capacity levels to rethink under what conditions it is worthwhile to introduce the OTA channel, and can be generalized to other industries with similar retailing settings.