Discussion Paper Details

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Title: Under-promise and Over-Deliver? - Online Product Reviews and Firm Pricing

Author(s): Simon Martin and Sandro Shelegia

Publication Date: September 2021

Keyword(s): consumer reviews, loss leadership, quality signaling and reputation

Programme Area(s): Industrial Organization

Abstract: We consider a signaling model capturing the introductory and the mature phase of a product. Information concerning product quality is transmitted between consumers through reviews, which partially depend on the expectations consumers had prior to their purchase. When future sales are sufficiently important, a novel tension arises: High-quality types may want to underpromise and overdeliver by imitating low types in order to get a better review. We show the existence of a Pareto-improving separating equilibrium. Both more informative reviews and price transparency can lead to higher prices. Our analysis reveals a new rationale for loss-leadership.

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Bibliographic Reference

Martin, S and Shelegia, S. 2021. 'Under-promise and Over-Deliver? - Online Product Reviews and Firm Pricing'. London, Centre for Economic Policy Research.