DP16508 Under-promise and Over-Deliver? - Online Product Reviews and Firm Pricing

Author(s): Simon Martin, Sandro Shelegia
Publication Date: September 2021
Keyword(s): consumer reviews, loss leadership, quality signaling, reputation
JEL(s): C73, D82, D83, L14, L15
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16508

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.