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.