Impact of consumer reviews and ratings on sales, prices, and profits: Theory and evidence

We provide a theoretical framework to understand the impacts of consumer reviews and ratings on firms' prices, sales, profits, and consumer surplus. We show how the economic impacts may differ depending on the informativeness of the reviews, the quantifiability of the product attributes, and the competitive environment. First, even though a monopolist always benefits from an improvement in product rating, a firm in a competitive market can hurt by it. When the low quality firm's product rating improves, its equilibrium profit will decrease if its quality is above a threshold, and increase if its quality is below that threshold. Second, if the high quality firm's product rating improves, both the high quality and the low quality firm will benefit. Our empirical findings based on point-and-shoot digital camera and multivitamin data collected from Amazon.com provide strong support for these results.