The influence of online customer reviews on two-stage product strategy in a competitive market

We investigate quality and pricing decisions for two competing firms in an e-marketplace with online customer reviews. Through developing two-stage game-theoretical models and comparing the equilibriums, we examine the optimal choice among different alternative product strategies: static strategy, adjusting the price, adjusting the quality level, and adjusting both the quality and price dynamically. Our results show that the existence of online customer reviews tends to encourage firms to increase quality and charge low prices in the early stage, and decrease quality and raise prices in the later stage. Moreover, firms should choose the optimal product strategies depending on the impact of customers' private assessment of product quality from the product information disclosed by firms on the overall perceived product utility and customer uncertainty about the perceived degree of product fit. After our comparisons, the dual-element dynamic strategy is more likely to outperform other strategies financially. Furthermore, we extend our models to examine how the optimal choice of quality and pricing strategies will change if the competing firms have asymmetric initial online customer reviews. From the extended analysis, a dynamic pricing strategy may generate better financial performance than the dynamic quality strategy, which is different from the finding in the basic scenario. Firms should choose the dual-element dynamic strategy, the dynamic quality strategy, the dual-element dynamic strategy coupled with dynamic pricing, and the dynamic pricing strategy in sequence as the impact of customers' private assessment of product quality on the overall perceived product utility and the weight that the second-stage customers place on their private assessment increase.

Automated summary

We study quality and pricing decisions of two competing firms in an e-marketplace with online customer reviews. Our results show that online reviews tend to encourage firms to increase quality and charge low prices in the early stage, while decreasing quality and raising prices in the later stage. Firms should choose optimal product strategies based on the impact of customers' private assessment of product quality and customer uncertainty about the perceived degree of product fit. The dual-element dynamic strategy is likely to outperform other strategies financially.