Understanding the Value of Online Customer Reviews: The Channel Perspective

The growing popularity of user-generated contents in the electronic commerce industry has allowed online customer reviews (OCRs) to play an increasingly important role in the customer decision-making process. The influences of OCRs have been studied extensively by academic researchers and industry practitioners from the customer side, whereas this study provides a complementary analysis of the value of OCRs from the channel side. We employ a game-theoretic model where a manufacturer sells to a group of customers through a single retailer. The customers are heterogeneous in their personal tastes and they use OCRs to update their knowledge of product functionalities. Surprisingly, we show with closed-form solution that positive OCRs could reduce the manufacturer’s and retailer’s profits because double marginalization in the decentralized channel might lead to overpricing. We also examine the case with information asymmetry where the manufacturer receives biased information of OCRs. The numerical results suggest that information asymmetry could significantly undermine both manufacturer’s and retailer’s profit, especially when the manufacturer tries to target a small group of customers with a high price premium.