The role of electronic word of mouth in reducing information asymmetry: An empirical investigation of online hotel booking

The hotel industry is plagued with asymmetric information, which may distort prices and reduce incentives to provide quality service. However, both branding and hotel star ratings play an important role in reducing information asymmetry. The question addressed here is whether electronic word-of-mouth (eWOM) - an increasingly popular form of online feedback -contributes to any further reduction in information asymmetry; and, if so, in what manner. Using a dataset of listed prices and guests’ ratings extracted from Booking.com, including several covariates, we show that the price–reputation gradient is much steeper in lower star-rated hotels than in higher star-rated hotels. The gradient is also steeper in unbranded hotels than in branded hotels. As lower star-rated and unbranded hotels are laden with greater quality uncertainty, this finding lends support to the hypothesis that the greater the information asymmetry, the greater the role of eWOM in reducing that uncertainty. Managerial implications are discussed.