Oct 10 2024
Published by
NYU Shanghai
Think about your online shopping experience – Are you more likely to buy the product with a five-star rating or a three-star? Do negative reviews discourage you from buying? With the rise of online shopping platforms, the importance of reviews in today’s market can’t be overstated. A new study by Dean of Business and Distinguished Global Professor of Business Chen Yuxin and Visiting Assistant Professor of Marketing Lei Ying, along with University of Hong Kong Assistant Professor Du Jinzhao, investigates how customer reviews affect the market. Their findings were recently published in Marketing Science.
Online shopping platforms, along with their rating and review systems, have transformed the way information is shared in the market. “Traditionally, price has been seen as the key signal of a product’s quality, as reflected in common sayings like ‘You get what you pay for,’” said Lei. “But today, customer reviews—whether ratings or written comments—have become a powerful new way to convey product quality. It’s important to examine how this new channel interacts with traditional price signals in today’s market.”
As reviews play a critical role in shaping purchasing decisions, both sellers and platforms are motivated to use them effectively. However, reviews often suffer from selection bias. “Think about your own shopping experience,” Chen said. “When are you most likely to leave a review?” Most customers don’t write reviews unless they’ve had an extreme experience, either good or bad, he explained. “To counter this bias, sellers may use strategies like lowering prices to make customers feel like they’ve gotten a great deal, which encourages positive reviews,” he said. “In our study, we examined how selection bias in customer reviews affects the market.”
The authors developed a model to examine how sellers of what they term “experience goods,” such as books, tours, or hotel stays, may use pricing and customer reviews to communicate product quality over time. The model analyzes two sales periods, during which different groups of consumers purchase the product. The first group, who are the early adopters, makes decisions based solely on price and leaves reviews reflecting their experiences. However, since not all customers leave reviews—and those who do often have extreme opinions—this results in biased feedback. The second group of consumers, who buy later, have more information to guide their decisions, including reviews from the first group, past prices, and the current price.
Based on their analysis into the model, the researchers’ insights can help us better understand the power of reviews and the impacts of review bias. Although we may instinctively believe that biased reviews are harmful, the study suggests that they can actually help the market convey product quality more effectively and improve consumer welfare. For example, high-quality sellers have incentive to reduce prices to counter the effects of negative biased reviews, encouraging more customers to leave feedback and reveal the product’s true quality. This benefits consumers and challenges the traditional view that only high prices indicate high quality. In some cases, low prices can also signal good-quality products when reviews are available and selection bias exists.
The study makes a significant theoretical contribution by revealing the dual role of pricing and reviews. “We found that price and reviews, as two distinct information channels, interact and enhance each other’s effectiveness in conveying quality information,” said Lei. “Rather than replacing each other, they complement each other.”
The researchers said they hope the study will help sellers develop better pricing strategies, understanding that price can be a powerful tool in mitigating the negative effects of biased reviews. As for us consumers, they say, no pressure to leave a review unless you feel motivated to – but remember, sometimes even low priced products can be high-quality!