The Impact of Online Recommendations and Consumer Feedback on Sales

Quality uncertainty and high search costs for identifying relevant information from an ocean of information may prevent customers from making purchases. Recognizing potential negative impacts of this search cost for quality information and relevant information, firms began to invest in creating a virtual community that enables consumers to share their opinions and experiences to reduce quality uncertainty, and in developing recommendation systems that help customers identify goods in which they might have an interest. However, not much is known regarding the effectiveness of these efforts. In this paper, we empirically investigate the impacts of recommendations and consumer feedbacks on sales based on data gathered from Amazon.com. Our results indicate that more recommendations indeed improve sales at Amazon.com; however, consumer ratings are not found to be related to sales. On the other hand, number of consumer reviews is positively associated with sales. We also find that recommendations work better for less-popular books than for more-popular books. This is consistent with the search cost argument: a consumer’s search cost for less-popular books may be higher, and thus they may rely more on recommendations to locate a product of interest.