Platform or Wholesale: Different Effects on Retailers of Online Product Reviews

Abstract

We study the effect of online product reviews on an online retailer under traditional wholesale-scheme and emergent platform-scheme when retailer carries two substitutable products produced by different manufacturers. Products differ in both qualities and fits to consumers\u27 needs. Reviews provide information for consumers to mitigate uncertainty about product’s quality and fit to consumers\u27 needs. We find that quality information homogenizes consumers\u27 utility differences between products and increases upstream competition, which drives down wholesale prices and always benefits retailer under wholesale-scheme whereas lowers manufacturers\u27 revenues and hurts the retailer under platform-scheme. Fit information heterogenizes consumers\u27 estimated fits to products and softens upstream competition, which pushes up wholesale prices and hurts the retailer under wholesale-scheme, whereas increases manufacturers\u27 revenues and benefits the retailer under platform-scheme. We demonstrate quality and fit information play very different roles in changing upstream competition, and whether retailer benefits from reviews critically depends on its pricing scheme choice