Publication Date: August 2020
The propensity of consumers to engage in word-of-mouth (WOM) diﬀers after good versus bad experiences, which can result in positive or negative selection of user-generated reviews. We show how the dispersion of consumer beliefs about quality (brand strength), informativeness of good and bad experiences, and price can aﬀect selection of WOM in equilibrium. WOM is costly: Early adopters talk only if they can aﬀect the receiver’s purchase. Under homogeneous beliefs, only negative WOM can arise. Under heterogeneous beliefs, the type of WOM depends on the informativeness of the experiences. We use data from Yelp.com to validate our predictions.
Keywords: Costly communication, Recommendation engines, Review platforms, Word of mouth