The Race for Online Reputation: Implications for Platforms, Firms, and Consumers

Online reputation (as reflected in customer ratings) has become a key marketing mix variable in the digital economy. This paper models how firms compete by managing their online reputations. We consider a market consisting of competing firms that participate in a platform such as Expedia or Yelp. Each firm exerts effort to improve its rating but, in doing so, also influences the mean market rating. The sales of a firm are influenced by its own rating and the mean rating of the firms in the market. We formulate each firm's decision as a stochastic control problem in which the objective is to maximize the discounted profit over a planning horizon. These control problems are connected through a common market belief that represents the mean rating of the firms in the market. The joint actions of the firms generate a mean market rating in equilibrium. We prove that such an equilibrium exists and is unique, and we use a simple algorithm to compute its value. An equilibrium analysis of the mean market rating reveals several insights. A more heterogeneous market (one in which the parameters of the firms are very different) leads to a lower mean market rating and higher total profit of the firms in the market. Our results can inform platforms to target certain firms to join: growing the middle of the market (firms with average ratings) is the best option considering the goals of the platform (increase the total profit of the firms) and other stakeholders, namely the incumbents and the consumers. For firms, we find that a firm's profit can increase from an adverse event (such as a reduction in sales margin or an increase in the cost of control) depending on how other firms in the market are affected by the event. Our findings are particularly significant for platform owners to employ a strategic growth model for the platform.

Automated summary

This paper examines the impact of online reputation on firm competition, finding that market heterogeneity affects total profit of firms. Additionally, the findings have significant implications for platform selection of firms to join, firm profit growth, and platform owners employing a strategic growth model.