Do online reviews improve product quality? Evidence from hotel reviews on travel sites.

with Yang Wang and Amit Pazgal

In this study, we use a game theoretic model to argue that the presence of online reviews can lead to product quality improvements for independent firms selling experience goods. Exploiting heterogeneous review plat- form penetration across markets, we test the predictions of our model using a dataset covering 40 thousand U.S. hotels and show that markets with greater platform penetration exhibit greater gains in independent hotel quality. Independent hotels located in median peak penetration platform-defined markets improved their quality by an average of .129 stars as measured using composite online travel agent (OTA) star ratings, eroding 41% of the advantage held by chains in the absence of online reviews. We address measurement noise challenges for quality and platform penetration using state space models to reveal persistent quality and platform penetration trends. Additionally, we resolve endogeneity due to potential unobserved confounds correlated with penetration and quality across markets and time. We do so by exploiting review platforms’ imperfect market definitions that divide areas of hotel agglomeration into separate review platform markets, thus quasi-exogenously assigning hotels in the same area to varying levels of online review exposure. Our research suggests that online reviews play an important role in facilitating competition on quality.

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