How do Different Sources of the Variance of Consumer Ratings Matter?

To examine the effect of the variance of consumer ratings on product pricing and sales we develop a model which considers goods that are characterized by two types of attributes: experience attributes and experience attributes that were transformed in search attributes by consumer ratings that we call informed search attributes. For pure informed search goods, we find that with increasing variance optimal price increases and demand decreases. For pure experience goods, we find that with increasing variance optimal price and demand decrease. For hybrid goods, when there is low total variance and the average rating and total variance are held constant, optimal price and demand increase with increasing relative share of variance caused by informed search attributes. Via this mechanism, risk averse consumers may prefer higher priced goods with a higher variance. In addition, our model provides a theoretical explanation for the empirically observed j-shaped distribution of consumer ratings.