Modeling Consumer Learning from Online Product Reviews

We propose a structural model to study the effect of online product reviews on consumer purchases of experiential products. Such purchases are characterized by limited repeat purchase behavior of the same product item (such as a book title), but significant past usage experience with other products of the same type (such as books of the same genre). To cope with the uncertainty in quality of the product item, we posit that consumers may learn from their experience with the same type of product, and others’ experiences with the product item. We model the credibility of product reviews and how it evolves over time. We apply the model to a panel dataset of 1,919 book purchases by 243 consumers. We find that consumers learn more from online reviews of book titles than from their own experience with other books of the same genre. We estimate the profit impact of product reviews and how it varies with the number of reviews. We find evidence of diminishing returns to increasing number of reviews. Under certain conditions, additional reviews might even lead to lower profits. We estimate the optimum number of reviews for a representative product