Online Reputation Mechanisms and the Decreasing Value of Brands

Abstract

This paper investigates the value of branding and how it is changing in response to a large increase in consumer information provided by online reputation platforms. Theory suggests much of the value of umbrella branding results from asymmetric information between buyers and sellers. As more information becomes available, consumers should rely less on brand names as quality signals and the ability for firms to extend reputations across heterogenous products or services should decrease. To examine this empirically, this paper combines a large, 15 year panel of hotel revenues with millions of online reviews from multiple platforms and performs a machine learning analysis of review text to recover latent, time-varying dimensions of firm quality. I find that branded, or chain-affiliated, hotels earn substantially higher revenues than equivalent independent hotels, but that the brand premium has declined by over 50% from 2000 to 2015. I find that this can be largely attributed to an increase in online reputation platforms, and that this affect is largest for low quality and small market firms. Using numerous measures of the information content of online reviews, increases in this information have increased independent hotel revenue substantially more than chain hotel revenue. Finally, the correlation between firm revenue and brand-wide reputation is decreasing and the correlation with individual hotel reputation is replacing it.