Influence of Online Reviews on the Dynamics of Product Quality and Pricing in a Competitive Market

ABSTRACT We study dynamic quality and pricing strategies in an e-platform with firm competition and online reviews by developing a two-period game-theoretical model. The results show that in equilibrium, online reviews lead to low selling prices in the early period but high product prices in the later selling period. On the side of equilibrium quality, online reviews will result in increased or reduced quality relying on the potential market size. Further, we examine the profit potential of the dynamic quality and/or dynamic price competition strategies. We find that the single dynamic quality competition strategy will always decrease profits of the firms. Regarding the single dynamic price competition strategy, it will increase profits of the rival firms with a large potential market size. Moreover, with a relatively large potential market size, the hybrid dynamic competition (dynamic quality and dynamic price competition) strategy is more likely to outperform the static competition strategy financially. Furthermore, we extend our model to examine how the quality and price strategies and the profit potential of dynamic competition strategies will change in the case of unit variable costs. We show from the extended analysis that in our setting, incorporating variable production costs does not alter the main findings of our research. The findings provide a decision-making framework for firms in choosing the initial and updated quality and price competition strategies with customer reviews.