In today’s competitive online retail environment, reviews represent an important quality signal that helps customers make more informed purchase decisions. The impact of reviews can propagate up the supply chain, affecting multiple firms’ decisions on pricing and product quality. HKUST’s Dongwook Shin and a colleague shed new light on this phenomenon, examining the influence of reviews on new product quality in a supply chain.

“Our analysis elucidates the main forces that underpin the interactions between firms and customers in the presence of reviews,” say the researchers. They develop a novel stylized model of a retail platform and a manufacturer to determine how reviews influence firms’ operational decisions in a supply chain with asymmetric information.

Their results have meaningful implications for firms operating in supply chains with product reviews. “First,” the researchers note, “information sharing in and of itself induces the manufacturer to improve quality.” However, “under a wholesale price contract, information sharing and product reviews together have a negative effect on product quality.”

This outcome is somewhat surprising. “Although the review system apparently improves transparency in quality assessment,” explain the researchers, “it may decrease the absolute level of product quality.” When each firm can adjust its price in response to a quality signal, only the manufacturer benefits. Consequently, the presence of reviews discourages the platform from sharing information and the manufacturer’s product quality falls.

How, then, can firms hedge the supply chain risk that arises from product reviews?

The researchers propose two solutions. “First, the platform may consider a commission contract,” they say. This would alleviate the negative effects of double marginalization, making firms more likely to share information; as a result, higher-quality products could be sold. “Second,” the authors say, “the platform may consider shading information under a wholesale price contract.” This would mitigate the negative effects of product reviews and enhance supply chain coordination.