Customer reviews have an unexpected effect on product design and quality

Consumer reviews have long been touted as a boon to businesses and consumers. Business icons including Amazon CEO Jeff Bezos — whose company ushered in the era of starred reviews by consumers — say that they help customers choose great products while nudging companies to improve the quality of their offerings.

But new research by Questrom’s Pnina Feldman, University of California at Berkeley’s Yiangos Papanastasiou, and Ben Gurion University’s Ella Segev suggests that this notion is incomplete at best. In the case of “experience goods” — products such as movies, smartphones, and software that are difficult to accurately evaluate before purchase — social learning through customer reviews may lead either to products of inferior quality or to products with modestly higher quality but significantly higher prices. “Generally, because of social learning, we find that firms can now invest less in the quality of their products,” Feldman says.

The paper found an array of reasons behind this surprising finding.

Social learning, for example, leads to a smaller proportion of early adopters and a higher proportion of “wait-and-see” consumers who strategically delay their purchase until they can read early reviews.

Companies have a few ways to respond to this behavior. To boost the number of early adopters to a given product — particularly when the uncertainty of a product’s quality is relatively low — firms are likely to design a product with a lower price and lower quality. When the uncertainty of a product’s quality is higher for consumers, firms are more likely to invest in superior design and quality — but attach a price tag that more than makes up for that investment. In the first case, the overall quality of the product is lower; in the second, the quality relative to the price is lower.

While Feldman acknowledges that there an array of other variables that affect product design and quality, customer reviews may not have the universally good effect that many might assume. “when quality is important, social learning does not provide a clear-cut benefit,” says Feldman. “We find that both firms and consumers may be harmed by social learning.”

Read the complete paper on SSRN.

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