When companies purchase information technology (IT) products for their employees, departments, or divisions, whether to standardize on one product or to allow the users to make their own choices is an important decision for IT managers to make. By consolidating demand and committing to buy from a single seller, standardization ensures product compatibility within the corporation and has a potential to induce intense price competition among sellers, but this potential is subject to whether competing products are compatible and the relative competitive advantages of the sellers. This paper studies when it is optimal for an employer to commit to exclusive purchase from a single seller to enforce standardization and sellers' incentives to invest in mutual compatibility. Our results suggest that the employer is more likely to make such a commitment when the competing products are compatible, less vertically differentiated, and/or more horizontally differentiated. We also find that the sellers agree to cooperate and invest in mutual compatibility only when the gap between their competitive advantages is moderate, but the availability of third party converters that enable partial compatibility can induce more collaboration among the sellers.
This paper examines how information provided by online reviews influences firms’ pricing strategy for repeat purchase products. It is commonly understood that online reviews can reduce consumer uncertainty about product characteristics and, therefore, have the potential to increase product demand and firm profits. However, when considering repeat purchase products, online reviews have an additional effect in that they can alter consumers’ propensity to switch among products, which can intensify price competition and lead to lower profits. The strength of these potentially offsetting effects depends on the informativeness of consumer reviews, which is a function of both objective review accuracy and the ability of consumers to obtain information from reviews when their idiosyncratic preferences over product characteristics might differ from the preferences of reviewers. The interplay of these competing effects results in an S‑shaped relationship between the quality of reviews and firm profits. There exists an optimal level of consumer informedness from the firms’ perspective, and competing firms may have incentives to facilitate consumer reviews in some markets but not in others. Given firms’ strategic pricing, consumers may also be worse off as review informativeness increases.
Consumer reviews may reflect not only perceived quality but also the difference between quality and price perceived value). In markets where product prices change frequently, these price-influenced reviews may be biased as a signal of product quality when used by consumers possessing no knowledge of historical prices. In this paper, we develop an analytical model that examines the impact of price-influenced reviews on firm optimal pricing and consumer welfare. We quantify the price effects in consumer reviews for different formats of review systems using actual market prices and online consumer ratings data collected for the digital camera market. Our empirical results suggest that unidimensional ratings, commonly used in most review systems, can be substantially biased by price effects. In fact, unidimensional ratings are more closely correlated with ratings of product value than ratings of product quality. Our findings suggest the importance for firms to account for these price effects in their overall marketing strategy and suggest that review systems could better serve consumers by explicitly expanding review dimensions to separate perceived value and perceived quality.
Online product reviews may be subject to self-selection biases that impact consumer purchase behavior, online ratings' time series, and consumer surplus. This occurs if early buyers hold different preferences than do later consumers about the quality of a given product. Readers of early product reviews may not successfully correct for these preference differences when interpreting ratings and making purchases. In this study, we develop a model that examines how idiosyncratic preferences of early buyers can affect long-term consumer purchase behavior as well as the social welfare created by review systems. Our model provides an explanation for the structure of product ratings over time, which we empirically test using online book reviews posted on Amazon.com. Our analysis suggests that firms could benefit from altering their marketing strategies such as pricing, advertising, or product design to encourage consumers likely to yield positive reports to self-select into the market early and generate positive word-of-mouth for new products. On the other hand, self-selection bias, if not corrected, decreases consumer surplus.