On the Internet

Chat rooms, recommendation sites, and customer review sections provide consumers with an opportunity to overcome geographic boundaries and to communicate based on mutual interests. However, marketers have incentives to anonymously supply promotional chat or reviews in order to influence the consumer's evaluation of their products. This, in turn, lowers the credibility of word of mouth transmitted online. We develop a game theoretic model where an incumbent and an entrant that are differentiated in quality compete for the same online market segment. The consumers are uncertain about the entrant's quality, whereas the firms know the value of their products. The consumers hear messages online that make them aware of the existence of the entrant as well as help them decide which product is superior. We find a unique equilibrium where online word of mouth is informative despite the promotional chat activity by competing firms. In this equilibrium, we find that firms spend more resources chatting up inferior products. We also find that promotional chat may be actually more beneficial to consumers than a system with no promotional chat. There are a number of extensions that we explore in this paper. Thus, we discuss how results change under different assumptions on the cost function of messaging and discuss price signaling in the context of online chat.