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The effect of online reviews on e-tailers’ pricing in a dual-channel market with competition

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Abstract

As opinion-rich information produced by consumers, online reviews function as both informants and recommenders. They are rather influential on the purchasing intention of potential consumers. But how to fix price for maximal profits on basis of online reviews remains a true challenge for online-sellers. Consumers are grouped into three types according to the channel of information they refer for purchasing decisions: (1) online information only; (2) online and offline information; and (3) offline information only. Based on the grouping, we construct a review-involved pricing model by the utility theory and game theory. The model considers the competition in pricing between e-tailer and physical retailer channels, and enables measurement of relationship between pricing and online reviews. Numerical simulation is used to explore the relationship between optimized revenue and other factors such as additional cost of online shopping, number of reviews, and applause rate of reviews. The results show that applause rate always has a positive effect on the pricing and profit in e-tails, and so does the number of online reviews except the case of extremely low applause rate. It is also shown that e-tailers can improve their profit by decreasing additional cost of online shopping, though the price will be lower.

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Acknowledgments

This work is supported by the NSFC Grant 70971099, 71371144 and 71402121, Shanghai philosophy and social science planning projects (2013BGL004), and the youth scientific fund of Jiangxi Province Department of Education (GJJ13533).

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Authors and Affiliations

  1. School of Economics and Management, Tongji University, Shanghai, 200092, China

    Kaiqiang Guo, Hongwei Wang, Yuan Song & Zhanqi Du

  2. School of Business, Jinggangshan University, Ji’an, 343009, China

    Kaiqiang Guo

  3. College of Engineering, Shanghai Ocean University, Shanghai, 201306, China

    Zhanqi Du

Authors
  1. Kaiqiang Guo
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  2. Hongwei Wang
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  3. Yuan Song
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  4. Zhanqi Du
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Correspondence to Hongwei Wang.

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Guo, K., Wang, H., Song, Y. et al. The effect of online reviews on e-tailers’ pricing in a dual-channel market with competition. Int. J. Mach. Learn. & Cyber. 9, 63–73 (2018). https://doi.org/10.1007/s13042-015-0346-5

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  • DOI: https://doi.org/10.1007/s13042-015-0346-5

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