Online Product Reviews-Triggered Dynamic Pricing: Theory and Evidence

Prior works offer compelling evidence that on the demand side of the market, user-generated online product reviews play a very important role in informing consumers' purchase decisions. On the supply side, however, the interplay between online product reviews and firm strategies is less understood. We build an analytical model that differentiates products based on consumers' preference for tastes (horizontal differentiation) or quality (vertical differentiation). We show that a monopolistic firm is able to not only manipulate its pricing to influence online product reviews (thus influencing sales), but also adjust pricing dynamically in response to online word-of-mouth. Our model derives rich results on possible price trajectories. To test the analytical predictions, we conduct an empirical study using a panel data of prices and reviews. We adopt a difference-in-differences framework to address the endogeneity challenges. We find evidence that firms adjust pricing in response to online product reviews.