User-Generated Content and Product Design of Competing Firms

User-generated content has been ubiquitous on the Internet. This paper studies the e ect of user-generated content on competing rms' product design decisions when they face uncertain consumer taste. User-generated content makes rms better informed about consumer taste because of the additional information revealed, and it also makes their information more correlated because user-generated content is common and accessible by all rms. We build a game theoretical model in which two competing rms design and sell horizontally di erentiated products to a group of consumers with unknown taste. Each rm observes a signal regarding consumer taste. We nd that the variance-reducing e ect embedded in user-generated content hurts the rms, and the correlation-increasing e ect bene ts the rms. The former is because uncertainty in the consumer taste makes rms unsure about where the demand is and thus can soften the competition between them. The reduced uncertainty by user-generated content intensi es the competition. The latter is because more correlated information can reduce the instances in which intended di erentiation realizes similar product designs because the blindness of each other's information, and thus more correlated information can help the rms better coordinate their product positioning. Whether rms lose or bene t because of user-generated content depends on the interaction between the two