This paper studies how information can affect consumer purchase decision and hence welfare on the book market on Amazon. By purchasing a series of high-frequency datasets, the authors merge information about Amazon sales rank, price, ratings, and book reviews from prominent newspapers such as the New York Times. They also purchase data on book sales from Nielsen. They study 3 major English markets, Amazon USA, UK and Canada. However, we (and they) focus on the results as they relate to the USA.
They find that there exists a positive causal relationship between price, ratings, number of ratings and being reviewed in a major newspaper, and the rank of a product on Amazon. This relationship is particularly strong when a book is recommended by the New York Times. Fixing power law structure on book sales, they compute the elasticity of demand as it pertains to each variable.
They find that the elasticity of demand of reviews from newspapers fall off drastically in the number of days since the publication of the review. This indicates that newspaper reviews create an immediate shock to demand, but its effects wane very quickly. They show that on average, raters who have rated books reviewed by the NYT and other newspapers rate books that have not been reviewed by the news outlets lower. Arguing that they enjoy critic reviewed books more than other books.
Studying the elasticity of Amazon stars at different percentiles of sales rank, the authors show that at the higher percentiles, Amazon stars have a larger demand elasticity than at lower stars. This can account for the popularity of products with higher stars. But also highlights how products with less popularity can benefit from having ratings. Suggesting that ratings on the long tail of products with few ratings still have an influence on demand.
Imposing a structural model of demand, the authors study welfare arising from ratings. The paper estimates that ratings and reviews may account for an increase in 50 million dollars on spending on books in the USA. However, gains in consumer surplus on Amazon alone amounts to 3million from newspaper reviews, and 35 million from Amazon ratings. It is argued that the large difference is due to the absence of newspaper reviews in certain categories. Suggesting that the broadness of Amazon reviews allows consumers to make better decisions more often, driving welfare gains.
As interesting results that is not explored further, the paper also highlights how the effect of New York Times reviews on book sales has increased over the last 15 years. They also provide some evidence that the effect of rating becomes larger when the term is interacted with reviews. Suggesting that ratings may play a larger role on the point of sales while reviews play a more important role in search. More research would be interesting on these two topics.