The Impact of Online Reviews for Service Competition of Online Retailers

With the growing popularity of online shopping and increasing competition among online sellers, retailers’ services become crucial for consumers’ purchasing decisions. Online retailers are opening marketplaces more frequently which enable suppliers to sell their products for a commission (agency model), expanding their traditional roles as resellers (reselling model). Consumers are uncertain about the value of retail services and rely on user-generated content (consumer reviews), and these reviews become crucial in online retail competition. In this paper, we analytically study the impact of online reviews on sellers in an online channel, where online retailers vending a product from a supplier compete on their services and the online reviews reduce consumers’ uncertainty about the services. Retailers differ in terms of product support and retail services both in their service quality and service taste to the consumers’ needs. We find that more helpful online reviews do not always increase profit for different parties in the channel. Instead, the profitability critically depends on how the reviews change (a) the distribution of the consumer valuation, which alters the substitutability between retailers, and (b) the relative attractiveness to either retailer. We show that the impact of reviews can be reversed for different channel members because of these two effects. The preferences of channel members to alternate pricing models hinge on the commission rate, the consumers’ reliance on the reviews, and the relative importance between service quality and taste to consumers. Finally, we identify a win-win scenario where all parties prefer the agency model.