When Online Reviews Meet Sales Volume Information: Is More or Accurate Information Always Better?

Abstract

This paper studies how two types of market-generated information, namely, online reviews and past sales volume information, jointly affect consumer purchase decisions as well as firms’ pricing strategies. We build a two-period duopoly model in a market with herding consumers who have different preferences and are unsure of the quality difference between products. In addition, a firm’s sales volume is uncertain because of the existence of “irregular” consumers. We find that the impacts of online reviews and sales volume information on firms’ profits are mutually enhancing. The impact of such market-generated information depends on both product characteristics (the level of consumers’ misfit for the nonpreferred product) and how consumers a priori perceive the quality difference between the products. Contrary to the conventional wisdom that more/accurate information is beneficial to high-quality firms, as well as consumers, we find that such information can be detrimental to firms, as firms adjust prices to induce, or react to, favorable market-generated information. Accordingly, consumers may not benefit from such market-generated information if the gain from less uncertainty cannot offset the loss from higher product prices. Such findings offer guidelines for firms to design better pricing strategies, as well as information policies, such as whether or not to promote more informative reviews. The online appendix is available at https://doi.org/10.1287/isre.2017.0715 .