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

Online reputation (as evidenced by customer reviews) has become a key variable of the marketing mix in the digital economy. This document models how businesses compete in managing their online reputation. Consider a market made up of competing companies participating in a platform like Expedia or Yelp. Every business strives to improve their rating, but in doing so, it also affects the market average rating. A company’s sales are affected by its rating and the average rating of companies in the market. We formulate each firm’s decision as a stochastic control problem in which the goal is to maximize discounted profit over a planning horizon. These control issues are linked by a common market belief that represents the average rating of companies in the market. Joint actions of companies generate an average market rating at equilibrium. We prove that such an equilibrium exists and is unique, and we use a simple algorithm to calculate its value. The analysis of the average equilibrium of the valuation markets reveals several insights.A more heterogeneous market (in which the parameters of the companies are very different) results in a lower average market score and a higher total profit of the companies in the market. Our results can inform the platforms to entice certain companies to join: growth in the middle of the market (medium rating companies) is the best option given the objectives of the platform (increasing the total profit of companies) and other stakeholders, namely the incumbent operators and consumers. For businesses, we find that a company’s profit may increase as a result of an adverse event (such as a reduction in the profit margin or an increase in the cost of control) depending on how other companies in the market are affected by the event. Our results are particularly important for platform owners who use a strategic platform growth model.

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