The Impact of Positive vs . Negative Online Buzz on Retail Prices

Online buzz or electronic word-of-mouth (e-WOM) has become more influential on customer decision-making due to increasing product complexity and product availability over the internet. Moreover, e-WOM spreads rapidly among customers and can be accessed anytime and anywhere, which further increases its significance. These e-WOM conversations describe products in a positive, negative or neutral way, but we do not know if and how such customer perceptions influence important business outcomes such as retail prices. This paper examines the effect of e-WOM on the prices of digital music players. Using a cutting-edge web crawling technique, we obtain the relevant buzz information collected from diverse online documents on a daily basis for two months. In particular, we capture online buzz sentiment, which allows us to investigate the different implications of positive, neutral, and negative online conversations. Econometric time-series modeling reveals that positive online buzz is a leading indicator of price increases, and vice versa. Furthermore, the effect of online buzz sentiment on prices is moderated by purchase involvement: negative online buzz leads to price cuts for high-ticket items, whereas positive online buzz enables price increases for low-priced items. These findings establish the influence of online buzz sentiment on e-retailers’ pricing power, and suggest that managers should frequently monitor the sentiment of online buzz around their products and respond appropriately by adjusting their prices promptly. College of Management, Long Island University, NY 11548, hyun.shin@liu.edu. 2 UCLA Anderson School of Management, Los Angeles, CA 90095, dominique.hanssens@anderson.ucla.edu. 3 Mango Analytics Inc., CA 94022, bharath@mangoanalytics.com. 1 “Consumers are highly influenced by the experience of other consumersfar more than they are by marketing professionals.” By John Lazarchic, Petco Vice President of e-Commerce

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