Leveraging online customer reviews in new product development: a differential game approach

Large volumes of online product reviews generated by customers have important strategic values for new product development. We consider a duopoly setting where two manufacturers aim to develop their own new products and services. Applying a differential game framework, we examine how online customer reviews can be leveraged as external knowledge for manufacturers to develop new products. In our base models, we assume that the products supplied by the manufacturers are homogenous. First, we consider a closed innovation setting as a benchmark case in which both manufacturers develop new products by their internal R&D without leveraging online customer reviews. Second, we propose a model in which one manufacturer leverages online customer reviews as external knowledge, while the other manufacturer only relies on internal R&D effort. We derive analytical equilibrium solutions to both models. We find that when one manufacturer uses online customer reviews, if the manufacturer’s R&D process becomes more effective in improving its new product performance or reducing its cost, it certainly hurts the other manufacturer, but it may sometimes hurt this particular manufacturer as well. Furthermore, we demonstrate that when the manufacturer utilizes online customer reviews more in R&D, both manufacturers’ profits can either increase or decrease. In an extended model, we relax the product homogeneity assumption and obtain the equilibrium solution analytically. We show that main managerial insights still hold in the extend model.