How Does the Variance of Product Ratings Matter?

28 Pages Posted: 7 May 2009 Last revised: 28 Sep 2011

See all articles by Monic Sun

Monic Sun

Questrom School of Business, Boston University

Date Written: September 19, 2010

Abstract

This paper examines the informational role of the variance of product ratings. We first build a theoretical model on how firm strategies and market outcomes respond to product ratings, and find that a higher variance of ratings increases subsequent demand and profit if, and only if, the average rating is low. We then discuss alternative assumptions on consumer behavior and market structure, and show that the primary forces at work in the baseline model are robust in many variations of the model. Finally, we provide some empirical evidence that is consistent with the model. The paper overall provides a unifying framework that helps managers to understand how variance of ratings, through its interaction with the average rating, plays a critical role in shaping consumers’ purchase decisions. It also points out that variance of product ratings can be used as an effective marketing tool in shaping a product’s perceived image among consumers.

Keywords: Theoretical Modelling, Information Transmission, Product Ratings

JEL Classification: M31, L15

Suggested Citation

Sun, Monic, How Does the Variance of Product Ratings Matter? (September 19, 2010). Available at SSRN: https://ssrn.com/abstract=1400173 or http://dx.doi.org/10.2139/ssrn.1400173

Monic Sun (Contact Author)

Questrom School of Business, Boston University ( email )

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