Start Date

14-12-2012 12:00 AM

Description

We study the effect of online product reviews on an online retailer under traditional wholesale-scheme and emergent platform-scheme when retailer carries two substitutable products produced by different manufacturers. Products differ in both qualities and fits to consumers' needs. Reviews provide information for consumers to mitigate uncertainty about product’s quality and fit to consumers' needs. We find that quality information homogenizes consumers' utility differences between products and increases upstream competition, which drives down wholesale prices and always benefits retailer under wholesale-scheme whereas lowers manufacturers' revenues and hurts the retailer under platform-scheme. Fit information heterogenizes consumers' estimated fits to products and softens upstream competition, which pushes up wholesale prices and hurts the retailer under wholesale-scheme, whereas increases manufacturers' revenues and benefits the retailer under platform-scheme. We demonstrate quality and fit information play very different roles in changing upstream competition, and whether retailer benefits from reviews critically depends on its pricing scheme choice.

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Dec 14th, 12:00 AM

Platform or Wholesale: Different Effects on Retailers of Online Product Reviews

We study the effect of online product reviews on an online retailer under traditional wholesale-scheme and emergent platform-scheme when retailer carries two substitutable products produced by different manufacturers. Products differ in both qualities and fits to consumers' needs. Reviews provide information for consumers to mitigate uncertainty about product’s quality and fit to consumers' needs. We find that quality information homogenizes consumers' utility differences between products and increases upstream competition, which drives down wholesale prices and always benefits retailer under wholesale-scheme whereas lowers manufacturers' revenues and hurts the retailer under platform-scheme. Fit information heterogenizes consumers' estimated fits to products and softens upstream competition, which pushes up wholesale prices and hurts the retailer under wholesale-scheme, whereas increases manufacturers' revenues and benefits the retailer under platform-scheme. We demonstrate quality and fit information play very different roles in changing upstream competition, and whether retailer benefits from reviews critically depends on its pricing scheme choice.