The Race for Online Reputation: : Implications for Platforms, Firms, and Consumers

Online reputation has become a key marketing-mix variable in the digital economy. Our study helps managers decide on the effort they should use to manage online reputation. We consider an online reputation race in which it is important not just to manage the absolute reputation, but also the relative rating. That is, to stay ahead, a firm should try to have ratings that are better than those of its competitors. Our findings are particularly significant for platform owners (such as Expedia or Yelp) to strategically grow their base of participating firms: growing the middle of the market (firms with average ratings) is the best option considering the goals of the platform and the other stakeholders, namely incumbents and consumers. For firms, we find that they should increase their effort when the mean market rating increases. Another key insight for firms is that, sometimes, adversity can come disguised as an opportunity. When an adverse event strikes the industry (such as a reduction in sales margin or an increase in the cost of effort), a firm’s profit can increase if it can manage this event better than its competitors.

Online reputation (as reflected in customer ratings) has become a key marketing-mix variable in the digital economy. This paper models how firms compete by managing their online reputations. We consider a market consisting of competing firms that participate in a platform such as Expedia or Yelp. Each firm exerts effort to improve its rating but, in doing so, also influences the mean market rating. The sales of a firm are influenced by its own rating and the mean rating of the firms in the market. We formulate each firm’s decision as a stochastic control problem in which the objective is to maximize the discounted profit over a planning horizon. These control problems are connected through a common market belief that represents the mean rating of the firms in the market. The joint actions of the firms generate a mean market rating in equilibrium. We prove that such an equilibrium exists and is unique, and we use a simple algorithm to compute its value. An equilibrium analysis of the mean market rating reveals several insights. A more heterogeneous market (one in which the parameters of the firms are very different) leads to a lower mean market rating and higher total profit of the firms in the market. Our results can inform platforms to target certain firms to join: growing the middle of the market (firms with average ratings) is the best option considering the goals of the platform (increase the total profit of the firms) and other stakeholders, namely the incumbents and the consumers. For firms, we find that a firm’s profit can increase from an adverse event (such as a reduction in sales margin or an increase in the cost of control) depending on how other firms in the market are affected by the event. Our findings are particularly significant for platform owners to employ a strategic growth model for the platform.