About AMA

There are many reasons to suspect ex ante that creating a forum for community content could be a poor strategy. First, it is not clear why users would bother to take the time to provide reviews for which they are not in any way compensated. Second, competing retailers can free ride on investments in recommender systems; there is nothing to stop a consumer from using the information provided by one Web site to inform purchases made elsewhere. Third, by providing user reviews, a site cedes control over the information displayed, and unfavorable reviews may depress sales; however, this may be less of a threat to a retailer that sells many different brands than it would be to a manufacturer. Similarly, because interested parties can freely proliferate favorable reviews for their own products, positive reviews may not be credible and may not function to stimulate sales. Finally, online user reviews may not be useful and may not stimulate sales because of the sample selection bias that is inherent in an amateur review process. That is, a consumer chooses to read a book or watch a movie only if he or she perceives that there is a high probability that he or she will enjoy the experience. In the presence of consumer heterogeneity, this implies that the pool of reviewers will have a positive bias in their evaluation compared with the general population. Thus, positive reviews may simply be discounted by potential buyers.

In this study, the authors characterize patterns of reviewer behavior and examine the effect of consumer reviews on firms’ sales patterns. In particular, they use publicly available data from the two leading online booksellers, Amazon.com and Barnesandnoble.com (BN.com), to construct measures of each firm’s sales of individual books. Both BN.com and Amazon.com allow customers to post reviews on their site. The econometric analysis in this article is designed to answer the question, If a cranky consumer posts a negative review of a book on BN.com but not on Amazon.com, would the sales of that book at BN.com fall relative to the sales of that book at Amazon.com? To isolate the answer to this question, the authors propose a “differences-in-differences” approach. For a sample of books, they measure reviews and a proxy for sales at Amazon.com and BN.com over three periods. They examine whether a change in (the number and quality of) reviews over time for a particular book at one site relative to the other predicts a change in the subsequent sales of that book at one site relative to the other.

The findings suggest that reviews tend to be positive on average, especially at BN.com. The authors show that the addition of new favorable reviews at one site results in an increase in the sales of a book at that site relative to the other one. They find some evidence that an incremental negative review is more powerful in decreasing book sales than an incremental positive review is in increasing them. The results on the length of reviews suggest that consumers actually read and respond to written reviews, not merely the average star ranking summary statistic provided by the Web sites.

Biography
Judith A. Chevalier is the Williams S. Beinecke Professor of Finance and Economics at Yale University and a Research Associate of the National Bureau of Economic Research. She received her PhD from the Economics Department at the Massachusetts Instituted of Technology. She has done research in both finance and economics, and has published recent articles on competition in online commerce and consumers’ durable good purchasing decisions. She is currently working on an article that examines the effect on consumers of state laws governing the sales of funeral goods.

Dina Mayzlin is Assistant Professor of Marketing at the Yale School of Management. She received her PhD from the Marketing Department at the Massachusetts Instituted of Technology. Her previous work dealing with online conversation (coauthored with David Godes) appeared in Marketing Science. She also has a forthcoming article in Marketing Science that analyzes firms’ incentives to promote anonymously online. Her other research interest is in the area of sales compensation.

Member Comments (0):

To rate or comment on articles, you must be a logged in AMA member. Click here to join