Abstract
We investigate the aggregate impact of consumer reviews on market outcome in a differentiated product category. We model consumers as Bayesian learners who use online consumer reviews to learn and update their beliefs on product quality before their choice. For our empirical analysis, we use aggregate-level, longitudinal data from Amazon.com in the digital camcorder category and estimate the demand parameters. Using model estimates, we conduct two simulation studies and quantify the impact of consumer reviews on the market outcome. We report that the products experience heterogenous market share changes: the standard deviation of market share changes across products and time is 16.7%, ranging from -40% to 20%. In addition, consistent with the previous findings in experience goods, the marginal effect of low consumer ratings is greater than that of high consumer ratings. We discuss model limitations and offer directions for further research.
Highlights
We investigate and quantify the aggregate impacts of consumer reviews on the market outcome in differentiated products market
Our key premise in this paper is that differentiated products have both search and experience attributes and shoppers depend on consumer reviews to learn about and resolve product uncertainty during their choice
We develop and incorporate the Bayesian learning model into a choice-based aggregate demand model
Summary
A large body of empirical research reports significant effects of online consumer reviews on consumer demand in books (e.g., Chevalier and Mayzlin 2006; Pathak et al 2010; Zhao et al 2013), in movies (e.g., Chakravarty et al 2010; Yu et al 2012; Chen et al 2019; Chintagunta et al 2010), and in video games (e.g., Zhu and Zhang 2010; Cui et al 2012). This paper follows the literature and posits that intangible and experience attributes are important to consumers in differentiated products market (e.g., Chen and Xie 2008; Huang et al 2009). We aim to make the following contributions to the empirical literature on consumer reviews
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