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Self-Selection and Information Role of Online Product Reviews

School of Business, University of Connecticut, Storrs, Connecticut 06269
The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
xli{at}business.uconn.edu
lhitt{at}wharton.upenn.edu

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 couldEdited to avoid redundancy. 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.

Key Words: online product reviews; self-selection; consumer heterogeneity; herding
History: This paper was received on June 13, 2006.