Impact of Online Word-of-mouth on the Market for Consumer Goods – the Interplay between Adoption Rate, Product Market Life and Market Size

Information and communication technologies have given rise to large-scale online word-of-mouth (WOM) referral networks which allow consumers to share information about products. With a larger online referral network, consumers are exposed to higher volume of WOM. Given the increased amount of WOM, consumers could face more intensified social pressures which would alter their adoption behaviors. While prior studies have mainly focused on the volume of WOM on product sales, the second-order effects of those enlarged online networks on consumers’ adoption behaviors and the market-level consequences such as product market life and size have not yet been explored. This paper studies (1) the impact of larger WOM networks on consumers’ adoption rates, (2) the consequent changes of product market lives and sizes, and (3) how these patterns differentiate across product types. Using 15 years movie data, we first empirically verify that adoption speed could have accelerated around 19981999. We attribute this structural shift to the early stages in the acceptance of popular online movie rating websites such as IMDB. Next, we theorize the dynamic impacts of a broader reach of WOM on market structures in terms of market life duration and size via an agent-based simulation model. We further propose four product categories based on different adoption attributes and show that adoption rate, market life and market size evolve differently under different product categories. We conclude with managerial implications of the findings.