Reading Between the Stars: Understanding the Effects of Online Customer Reviews on Product Demand

Abstract

Problem definition: Many studies have examined quantitative customer reviews (i.e., star ratings) and found them to be a reliable source of information that has a positive effect on product demand. Yet the effect of qualitative customer reviews (i.e., text reviews) on demand has been less thoroughly studied, and it is not known whether (or how) the sentiment expressed in text reviews moderates the influence of star ratings on product demand. We are therefore led to examine how the interplay between review sentiment and star ratings affects product demand. Academic/practical relevance: Consumer perceptions of product quality and how they are shared via customer reviews are of extreme relevance to the firm, but we still do not understand how product demand is affected by the quantitative and qualitative aspects of customer reviews. Our paper seeks to fill this critical gap in the literature by analyzing star ratings, the sentiment of customer reviews, and their interaction. Methodology: Using 2002–2013 data for the U.S. automobile market, we investigate empirically the impact of star ratings and review sentiment on product demand. Thus, we estimate an aggregated multinomial choice model after performing a machine learning–based sentiment analysis on the entire corpus of customer reviews included in our sample. We take advantage of a quasi-exogenous shock to establish a causal link between online reviews and product demand. Results: We find robust empirical evidence that (i) review sentiment and star ratings both have a decreasingly positive effect on product demand and (ii) the effect (on demand) of their interaction suggests that the two components of reviews are complements. Positive sentiments in text reviews increase the positive effect of ratings when the effect of ratings is decidedly positive while they also compensate for the tendency of consumers to discount extremely high star ratings. Managerial implications: The firm should pay greater attention to quantitative and qualitative customer reviews to better understand how consumers perceive the quality of its offerings.