Abstract
This paper examines the informational role of the variance of product ratings. We first build a theoretical model on how firm strategies and market outcomes respond to product ratings, and find that a higher variance of ratings increases subsequent demand and profit if, and only if, the average rating is low. We then discuss alternative assumptions on consumer behavior and market structure, and show that the primary forces at work in the baseline model are robust in many variations of the model. Finally, we provide some empirical evidence that is consistent with the model. The paper overall provides a unifying framework that helps managers to understand how variance of ratings, through its interaction with the average rating, plays a critical role in shaping consumers’ purchase decisions. It also points out that variance of product ratings can be used as an effective marketing tool in shaping a product’s perceived image among consumers.
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