Online word-of-mouth and market structure
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Online word-of-mouth and market structure Carlos Daniel Santos1 Received: 8 January 2019 / Accepted: 25 May 2020 / © ISEG – Instituto Superior de Economia e Gest˜ao 2020
Abstract Hotels adjust their product offerings depending on demand and competition faced. In this article I document the increase in average hotel quality as measured by online ratings, following the 50% increase in the number of tourists between 2008 and 2011. This change in quality is heterogeneous across hotel type. An increase in quality from high quality hotels positively influences other high quality hotels while increasing quality from low quality hotels positively influences other low quality hotels. Effects across quality levels (i.e. low on high and vice-versa) are insignificant. Finally, I quantify the gains from online ratings. Using a nested logit demand model I estimate that a one standard deviation increase in rating is associated with a 27% increase in demand. As a comparison, a 1 star increase in hotel class generates an approximate 70% increase in demand. Furthermore ratings are substantially more important for hotels with less stars, confirming the predictions that hotels with a lower signal, have more to gain from the existence of online user generated content. Keywords Marketing strategy · User-generated content · Online word-of mouth · Dynamic games · Product quality JEL Classification C57 · L15 · L83
1 Introduction Customers can be active contributors to the brand equity value of the firm. Firms use a variety of strategies to differentiate from the competition and to develop a unique value proposition for their customers. The emergence of new technologies, in particular, the change of customer role from passive to active, generates new opportunities and threats. One industry that has been visibly influenced by these new trends is tourism. Tourist services are increasingly purchased online, with customers leaving Carlos Daniel Santos
[email protected] 1
Nova School of Business and Economics (NovaSBE), Rua da Holanda 1,2775-405 Carcavelos, Portugal
C.D. Santos
detailed reviews about the quality of the services they have purchased. This new role is slowly changing the way companies value their customers who are now active marketing vehicles. The gains from online customer reviews is unlikely to be homogenous across companies. Small companies have potentially more to gain, by scaling up their marketing efforts and benefiting more from active customers. In a signalling model, cheap online channels become substantially more important for small/unknown players, such as Bed & Breakfasts. Besides this anonimity effect, size restrictions prevent companies from accessing certain market segments. Smaller B&Bs would not have the opportunity to enter traditional channels where presence into a network of travel agents was the main source of tourist acquisition. In this article we use existence of online channels to explain the industry change observed in the city of Porto (Portugal). Following the growth in the number of tour
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