Selling New Products with Social Learning: The Role of Online Product Reviews

Abstract

This paper studies the impact of consumers' social learning from the reviews of early adopters of a new product. We consider a two-period setting with an introduction (penetration) period followed by the product maturing period. Early buyers make purchase decisions in the introduction period under significant product valuation uncertainty and future price uncertainty and would like post reviews online to share their experiences about the product. The online product reviews posted by early adopters play an important role in shaping following consumers' product valuations and further influence their purchasing decisions. While the majority of research on social learning focuses on the impact of social learning on the consumer decisions and firm pricing in the maturing period, we find an indirect impact of electronic word-of-mouth (EWOM) on the strategic early buyers' purchase decisions and firm pricing in the introduction period. When early buyers make purchase decisions, they need to forecast the future second period price, estimate the expected utility from waiting, and compare it with the expected utility from buying early. We find that social learning increases the uncertainty in future price, which depends on reviews and therefore unknown, for early buyers in the introduction period. This price-uncertainty-increasing effect may balk early buyers from adopting in the introduction period and thus impact a firm's profit. Driven by this effect, we find that under social learning negative reviews may benefit a firm while positive reviews can also hurt a firm.