Tech Industry

Competitive Responses Of Pricing, Advertising And Product Premium To Consumer Reviews

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Executive Summary

Consumer product reviews, one of the earliest forms of online user generated contents, play a very significant role in consumer buying decisions as they help consumers resolve or reduce uncertainties about product features and qualities before their purchases. The authors provide a game-theoretic model to study as to how consumer reviews influence firms' advertising, product premium, and pricing strategies. The authors highlight several interesting findings. First, consumer reviews and firms' advertising do not affect their product premium strategies. Second, even though favorable reviews and advertising are perfect substitutes with respect to increasing consumers' willingness to pay, the firm may actually consider them as complements, especially when advertising is expensive.

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