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dc.contributor.authorFainmesser, IPen
dc.contributor.authorLauga, Dominique Olie Laugaen
dc.contributor.authorOfek, Oen
dc.date.accessioned2020-10-09T23:30:06Z
dc.date.available2020-10-09T23:30:06Z
dc.identifier.issn0025-1909
dc.identifier.urihttps://www.repository.cam.ac.uk/handle/1810/311312
dc.description.abstractWe study how user-generated content (UGC) about new products impacts a firm’s advertising and pricing decisions as well as the effect on profits and market dynamics. We construct a twoperiod model, where consumers value quality and are heterogeneous in their taste for the new product’s positioning, and examine three information transfer structures across generations: no information (Benchmark); average rating (AR); and the joint distribution of ratings and taste locations (Reviews). First, we show that in the AR case the firm advertises to a smaller set of consumers and prices higher relative to the other cases. This occurs because the firm has an incentive to use advertising strategically to bump up the first-generation average rating in order to increase second-generation quality perceptions. The firm charges a higher first-period price as consumers who are relatively close to the product’s location are advertised to. Second, we find that as more information is transferred across generations there is a greater likelihood that average ratings will exhibit an increasing pattern over time. This happens because with Reviews second-generation consumers are able to base purchase decisions on the product’s positioning in addition to its quality. Interestingly, due to the firm’s narrower advertising strategy in the AR case and the richer UGC in the Reviews case, average ratings will exhibit a reversal over time: higher in the AR case in the first period but higher in the Reviews case in the second period. Third, a firm’s expected profits can exhibit a non-monotonic relationship with respect to the amount of UGC transferred: highest in the AR case if the marginal return on advertising is high (e.g., when advertising is cheap to execute, consumers are insensitive to product fit, or consumers greatly value quality), but highest in the Reviews case when the return on advertising is low. We then examine a setup whereby second-generation consumers become aware of the product through social interaction with first-generation buyers. We find that advertising and social contagion interact - the firm generally has a greater incentive to advertise as homophily increases, i.e., as social interactions occur between consumers who more likely share similar preferences. However, this pattern can reverse with Reviews. The paper discusses several robustness checks and model extensions, and concludes by highlighting the managerial implications of the results.
dc.publisherInstitute for Operations Research and the Management Sciences
dc.rightsAll rights reserved
dc.titleRatings, reviews, and the marketing of new productsen
dc.typeArticle
prism.publicationNameManagement Scienceen
prism.volume0en
dc.identifier.doi10.17863/CAM.58402
dcterms.dateAccepted2020-08-28en
rioxxterms.versionofrecord10.1287/mnsc.2020.3848en
rioxxterms.versionAM
rioxxterms.licenseref.urihttp://www.rioxx.net/licenses/all-rights-reserveden
rioxxterms.licenseref.startdate2020-08-28en
dc.identifier.eissn1526-5501
rioxxterms.typeJournal Article/Reviewen
cam.issuedOnline2020-12-30en
cam.orpheus.counter18*


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