Word of mouth can be tremendously influential in how consumers discover
products, particularly within categories such as music, film, books, and video
games. This research explores the role word of mouth recommendations play in
influencing how consumers discover and purchase products, both offline and
The online retail environment in particular has become an important area
where consumers obtain product recommendations that inform their purchasing.
Accessing the recommendations of others has become ever more common with the
growth of online retailers such as Amazon, thanks to the consumer feedback on
products they present on their pages.
This paper presents a model of consumer search to explain the impact of
product recommendations on consumer product discovery and the concentration of
The model explains a firm's incentives to increase the efficiency of word of
mouth, namely to reduce the cost of accessing recommendations and to improve
matching between consumers and the products.
The model also explains the consequences of such improvements for consumers
and for the concentration of sales within the firm's product range. We find
that both are intrinsically linked. When consumers with more prevalent
preferences are the main beneficiaries of these improvements, the concentration
of sales increases, generating a "superstar" effect. This increases the
performance of bestselling products.
When consumers with less prevalent preferences, such as niche items, are the
main beneficiaries, the concentration of sales is reduced, generating a long
tail effect. As a result, products representing a small share of total sales
(located in the tail of the sales distribution) perform better in the online
The model reconciles lower sales concentration in online retail with the
firm's logic for profit maximisation, and informs the design of marketing
strategies to exploit consumer word of mouth.
Implications for competition are worthy of note. Firms with a large customer
base will profit the most from online word of mouth and recommendation systems.
These systems benefit from a large stock of consumer feedback to improve their
accuracy and exhibit a learning curve to identify the preferences of new
customers. Consumers will receive less accurate recommendations when switching
purchases across firms and, in general, when patronising smaller firms. Both
factors suggest that the firm can exploit consumer word of mouth to grow its
customer base and outperform competitors over time.
To our knowledge this is the first theoretical work to explore the links
between word of mouth and sales concentration.
A final author version of the research paper is available for download at
the link below.