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