How online reviews affect consumer’s quality belief: ex-ante and ex-post preference of consumption decision

Many researchers focused on the impact of online reviews on sales, only a few researchers investigate consumer satisfaction following the purchasing decision. I hypothesised that online reviews would have an impact on both sales and returns. I first elaborated on the hypotheses with an analytical model that demonstrates how risk-neutral reference-dependent consumers form a quality belief and their consumption utility after consumption. Further, I empirically tested the hypotheses using cross-sectional data set collected from Taobao.com. By controlling the effect of types of products, and adding monetary incentiveas the instrumental variable for positive review rates, I ran 2SLS regressions of sales and returns on reviews. The result supports the proposition that the positive review rate is positively associated with both returns and sales, while the negative review rate is negatively associated with both returns and sales. Consumers tend to overestimate true product quality with positive reviews, while negative reviews tend to be more informative about the true quality of products. This is because sellers generally manipulate positive reviews and ratings to attract potential buyers. The result suggests that consumers could discount their quality beliefs before making the purchasing decision. This would not only increase the reference-dependent consumption utility but also reduce the transportation cost of returning products. Thus, achieving a more efficient allocation of resources.