Identifying the Actual Impact of Online Social Interactions on Demand

Firms often engage in manipulating online reviews as a promotional activity to influence consumers' evaluation on their products. With the prevalence of the promotional activities, consumers may notice and discount the reviews generated by the promotional activities. Discounting the firm-generating reviews may cause systematic measurement errors in the valence variable and lead to a negative bias when estimating the effect of consumers' organic reviews on demand. To correct the bias, this study proposes including product-specific bias-correction terms representing the proportion of extreme reviews in analysis. For illustration, the proposed method is applied to a demand model for data of movies released in South Korea. The results confirm a negative bias in the estimate of the valence sensitivity of demand. The negative bias potentially leads to an underestimation of the magnitude of the contagion effect through social interactions, a key component of evaluating the value of a satisfied consumer.