Self Selection and Information Role of Online Product Reviews

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 regarding 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 could potentially 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.

Introduction. Word of mouth has long been recognized as a major driver of product sales. Not only can word of mouth generally increase consumer awareness, but it may be one of the only reliable sources of information about the quality of experience goods (i.e., products not easily characterized prior to consumption). With the development of the Internet, word of mouth has moved beyond small groups and communities to being freely available through large-scale consumer networks (Avery, Resnick and Zeckhauser 1999). These networks have magnified the depth and span of word of mouth to an unprecedented scale. Online opinion and consumer-review sites have correspondingly changed the way consumers shop, enhancing or even supplanting traditional sources of consumer information such as advertising. In a survey of 5,500 web consumers conducted by BizRate, 44% of respondents said they had consulted opinion sites before making a purchase, and 59% considered consumer-generated reviews more valuable than expert reviews (Piller 1999).

Discussion / Conclusion. This paper suggests that because different consumers generally hold different opinions about a product’s quality, consumer-generated product reviews may not be an unbiased indication of unobserved quality even with totally truthful reviews. If consumers’ tendency to purchase early and their likelihood of satisfaction is correlated, this self-selection behavior can cause systematic bias in reviews posted in the early periods. This correlation can be positive or negative. In this study, we develop and empirically test 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. The assumptions of the model are tested using online book reviews and sales data collected from Amazon.com. We find that for a majority of books, consumer reviews posted in early periods are systematically positively biased. In addition, we find evidence that consumers do not discount the early reviews when they refer to consumer book reviews for quality information.