Social Media and Product Line Design

Abstract

It is common for consumers to rely on opinion leaders, who presumably have a higher expertise in the product category, to form beliefs about the product quality. At the same time, the evaluations and product adoptions of opinion leaders are influenced both by the product quality and by their idiosyncratic preferences (fit). When opinion leaders do not provide a very detailed review, their followers need to form expectations of how much the opinion leader's recommendation is driven by product quality and how much it is driven by an idiosyncratic fit of the product to the opinion leader. This paper considers how the firm should adjust its optimal choice of the product variety in the presence of word of mouth, given that the opinion leader is likely to have more expertise and therefore, be better able to choose the version of the product that fits her best. It shows that while the opinion leader's presence may be a force toward either an increased or decreased number of variants, generally speaking, the distortion is upward if it is more difficult to satisfy the opinion leaders, which could be either due to the higher importance of fit or due to their higher standards. We further show that the firm's knowledge of the true quality may increase the distortion of the number of product variants it offers even when the equilibrium number of variants is pooling across the product qualities.