The impact of online reviews on pricing strategy and coordination in a two-period two-echelon supply chain

Abstract

Online reviews have attracted much attention from firms as they play a significant role in consumers' purchase decisions. While prior investigations have explored the impact of online reviews on firms' operational decisions, little is known about how review volume and valence affect different players' operational decisions in a channel structure. We develop game-theoretic models to examine the effect of review volume and valence on different players' pricing strategies under two-period centralized, decentralized, and coordination structures composed of an online retailer and a manufacturer. The results indicate that the retailer and manufacturer benefit from a high review valence but are not necessarily harmed by a low review valence. Particularly, when review volume is sufficiently large, the low review valence may also bring more profits. In this case, online reviews can expand the potential market. Finally, a two-period two-part tariff contract can perfectly coordinate the supply chain and create a win-win situation for both the retailer and manufacturer under certain conditions. The manufacturer may charge a sufficiently low first-period wholesale price and even subsidize the retailer under a low valence and moderate number of reviews. Our results offer a more complete understanding of the implications of reviews in supply chain management.