Pricing Strategies in Presence of Online Consumer Ratings—From the Product Customization Perspective

Although there is abundant evidence that online consumer ratings have significant impacts on firms’ pricing strategies, it is unclear how such impacts are influenced by the degree of product customization. This paper sets up a two-period dynamic model to analyze a firm’s pricing strategies and the changes in its profitability when it sells products with different customization degrees (i.e., niche, neutral or mainstream). Consumers are uninformed of the product value. However, the first-period consumers generate online consumer ratings after their consumptions, and such ratings enable the second-period consumers to better understand the product value and thus to improve their purchasing decisions. Our results show that, in anticipation of the impacts of online consumer reviews, the firm should adjust its pricing strategy according to the customization degree of its product. In particular, for neutral products, the firm should lower its expected price in the second period comparing to its first period price, but for niche and mainstream products, the pricing adjustments over periods depend on the product value.