How Does User-Generated Content Influence Consumers’ New Product Exploration? An Empirical Analysis of Consumer Search and Choice Behaviors

Abstract

User-generated content (UGC), such as online product reviews, has grown rapidly on the Internet with the pervasiveness of Web 2.0 technologies. In this study, we investigate the underlying process of how individual consumers perceive and use online UGC information to guide their new product exploration and purchase decisions. We propose that online UGC influences an individual consumer’s new product exploration and purchase by (1) informing consumers of more choice alternatives in a market (information effect), (2) highlighting new choice alternatives that have a higher expected utility than that of their prior choices (experience effect), and (3) signaling the quality of competing choice alternatives (competition effect). Using a unique data set that consists of online reviews of restaurants on a popular consumer review website, consumers’ information search and clickstream records on the same website, and consumers’ actual patronage data on restaurant dining transactions, we specify and estimate a structural discrete choice model to empirically evaluate the influence of online UGC on individual consumers’ decision in visiting restaurants. Our model assumes that consumers follow a two-stage decision process. In the first stage, consumers decide whether to explore a new restaurant. In the second stage, consumers decide which specific restaurant to patronize. Our model estimation approach accounts for observed and unobserved consumer heterogeneity, as well as for the potential endogeneity of consumer search. Our results show that consumers are more likely to sample a new restaurant after being exposed to more UGC of previously unvisited new restaurants, and when online UGC of restaurants highlight new alternatives with a higher expected utility than that of previously patronized restaurants. Consumers are also more price sensitive and assign more positive weight on UGC volume when they explore new product alternatives. Our findings on consumer new product exploration behaviors in the context of user-generated reviews have important implications for research, as well as for practices in terms of content marketing and designing product recommendation systems in e-commerce websites.