When Online Reviews Meet Sales Volume Information : Does More/Accurate Information Always Is Always Beneficial?

The advancement of IT has made it easy to communicate the online review information of a product and its previous sales volume information, both of which affect consumer purchase. How should firms react to the coexistence of these two types of information? Should the firms reduce their prices initially to generate sales, or set a higher price expecting more informative/accurate information in the future? We build a two-period duopoly model in a market with herding consumers who have different taste preferences and are unsure of the quality difference between the products. Consumers can be irrational whose purchase decision is not affected by the relative prices of the products, so that the previous sales volume information is not completely controlled by firms. We find that the relative importance of quality differentiation to the horizontal differentiation, or the horizontally-adjusted quality difference, plays an important role in determining the firm's pricing strategy under the influence of the two types of information. More specifically: (1) firms have an incentive to reduce their first-period price in order to enlarge sales volume but may not be able to raise their prices in the second period if the online review and/or sales volume information is not sufficiently favorable; (2) online review does not help a high-quality firm (nor hurt a low-quality firm) when the sales volume information is more (less) favorable than the review information; (3) informative review, which provides detailed taste information, is in general beneficial by reducing price competition. However, it may hurt firms when the horizontally-adjusted quality difference is significant. Similar findings apply to more precise sales volume information. Such findings offer guidelines for firms to design better pricing as well as information policies such as whether to promote more informative reviews