How do Different Sources of the Variance of Consumer Ratings Matter?

We examine the effect of the variance of consumer ratings on product pricing and sales using an analytical model, which considers goods that are characterized by experience attributes and informed search attributes (i.e., experience attributes that were transformed in search attributes by consumer ratings). For pure informed search goods, equilibrium price increases and demand decreases in variance. For pure experience goods, equilibrium price and demand decrease in variance. For hybrid goods with low total variance, equilibrium price and demand increase with an increasing relative share of variance caused by informed search attributes when the average rating and total variance of ratings are held constant. Hence, risk-averse consumers may prefer a more expensive good with a higher variance of ratings out of two similar goods with the same average rating. Moreover, our analytical model provides a theoretical foundation for the empirically observed j-shaped distribution of consumer ratings in electronic commerce.