Strategic implications of online word of mouth
In recent years, large-scale consumer networks on the Internet have provided a new communication channel for consumers to share product evaluations online. These networks have dramatically increased the impact of word of mouth, and correspondingly changed the way consumers shop. One form of word of mouth recently emerging on the Internet is product reviews written by consumers. In chapter one, we examine the role of consumer heterogeneity in affecting the accuracy of these product reviews as a mechanism to communicate quality information among consumers. When consumers hold different opinions about quality of the same product, consumers' self-selection behavior in purchase may cause bias in reviews at various stages of the product lifecycle. Using book reviews posted on Amazon, we find a significant declining curve in book ratings over time, which suggests that consumers who self-select into the market early (tend to buy early) may have systematically different preferences compared to the consumers who buy later. In addition, our additional empirical evidence suggests that consumers follow early reviews regardless of the bias. We then construct an analytical model based on the empirical observations to examine how consumer welfare and firm strategies are affected by the presence of consumers' self-selection behavior. In chapter two, we investigate how market competition can be influenced when consumers can acquire quality information for untested products from consumer reviews. Our results show that, contingent on the accuracy of consumer reviews as a mechanism to signal quality, the reduction of uncertainty driven by these reviews does not necessarily force the market to become more competitive.
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