Investigating the Role of Online WOM Content and Sender-Receiver Similarity in Social Learning

Abstract

In this research, we develop an analytical model to investigate how the content of Online Word of Mouth (OWOM) impacts prices, product adoption, and profit when consumers have uncertainty about both the product quality and their own appreciation of quality. We consider how pricing is impacted by the presence of both satisfaction- and information-focused OWOM content with preference correlation between OWOM senders and receivers. There are several findings from this research. First, we find that when there is a mix of OWOM content, increasing the proportion of satisfaction-focused OWOM will increase price and profit for the low-quality firm, but has a U-shaped impact on the high-quality firm profit. Second, we find that profitability can be increased by restricting the type of OWOM content. Specifically, both high- and low-quality firms earn greater profit from an online platform with only satisfaction-focused OWOM than from a platform with a mix of both satisfaction- and information-focused OWOM. However, only the high-quality firm can earn greater profit from a platform with only information-focused OWOM than a firm with a mix of each, and this greater profit is only achieved if consumers have a strong enough incentive to send OWOM. Third, we find that preference similarity between senders and receivers of OWOM negatively impacts the low-quality firm but has a U-shaped effect on the profitability of the high-quality firm. Moreover, preference similarity can not only impact the consumers’ incentive to send a satisfaction vs. information review, it also affects how receivers of the OWOM update their beliefs about product quality and their own appreciation of quality. We discuss how firms can formulate appropriate strategies in response to OWOM by understanding its different dimensions (valence, focus, and similarity among senders and receivers).