User-Generated Content and Competing Firms' Product Design

Firms employ various techniques to obtain information about consumer taste/location and valuation prior to making product design decisions. User-generated content has become an important information source. The vast variety and volume of user-generated content makes firms better informed about consumers (precision-improving effect), and the common and public nature of user-generated content makes firms' information more correlated (correlation-increasing effect). We examine the impact of user-generated content in a setting in which two competing firms that are uncertain about consumer location or valuation design and sell horizontally differentiated products. We find that user-generated content has very different implications for competing firms' location decisions and quality decisions. When firms are uncertain about consumer taste and choose their product locations, whether firms and/or consumers benefit from the user-generated content depends on which of the two effects dominates. We find that only when the correlation-increasing effect is moderate, a win-win scenario for both firms and consumers occurs, but the society always benefits from user-generated content. Stronger consumer preference strengthens the overall impact of user-generated content. In sharp contrast, when firms face uncertain consumer valuation of quality and choose product quality, they do not benefit from user-generated content, but consumers may benefit or lose from it. When the correlation-increasing effect is significant, both firms and consumers, and therefore the society, are hurt by user-generated content. Stronger consumer preference mitigates the negative impact but amplifies the positive impact of user-generated content in this case.