User-Generated Content and Competing Firms' Product Design

Abstract

Firms employ various techniques to obtain information about consumer taste/location and valuation prior to making product design decisions. User-generated content, a hallmark of Web 2.0 technologies, is becoming an important source of consumer information for firms. The vast variety and volume of user-generated content makes firms better informed about consumers (precision-improving effect). Furthermore, the common and public nature of user-generated content makes firms' information about consumers more correlated (correlation-increasing effect). We examine the impact of user-generated content in a setting where two competing firms uncertain about consumer location or valuation design and sell horizontally differentiated products. We find that user-generated content has very different implications for competing firms' location decisions and quality decisions. When firms choose their location in the consumer taste space and are uncertain about consumer taste, we find that user-generated content can have a negative or positive overall impact on firms depending on whether the precision-improving or the correlation-increasing effect dominates. Also, user-generated content may have a positive or negative effect on consumers. Only when the correlation-increasing effect is moderate, a win-win scenario for both firms and consumers occurs, but the society always benefits from user-generated content. Stronger consumer preference exacerbates the negative impact and amplifies the positive impact of user-generated content in this case. In sharp contrast, when firms choose product quality and face uncertain consumer valuation of quality, they do not benefit from user-generated content, but consumers may benefit or lose from it. When the correlation-increasing effect is significant, both firms and consumers, and therefore the society, are hurt by user-generated content. Stronger consumer preference mitigates the negative impact and amplifies the positive impact of user-generated content in this case.