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Pricing, Frills, and Customer Ratings

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Author Info

  • Dmitri Kuksov

    ()
    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

  • Ying Xie

    ()
    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

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    Abstract

    This paper explores whether and how a firm should adapt its strategy in view of consumer use of prior customer ratings. Specifically, we consider optimal pricing and whether the firm should offer an unexpected frill to early customers to enhance their product experiences. We show that if price history is unobserved by consumers, a forward-looking firm should always modify its strategy from single-period optimal one, but it may be optimal to do so by lowering price, by lowering price and offering frills, or by raising price and offering frills, depending on the market growth rate. Specifically, the last strategy becomes optimal when market growth rate is high enough. The results are similar when the price history is observed by consumers, except that no deviation from single-period profit maximization choices is optimal when market growth is low enough. We also analyze whether the firm should prefer that the price information be stated in or left out of consumer reviews. In addition, in considering the effects of consumer heterogeneity, we conclude that the optimal firm's effort to affect ratings is higher when the idiosyncratic part of consumer uncertainty is larger.

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    File URL: http://dx.doi.org/10.1287/mksc.1100.0571
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 29 (2010)
    Issue (Month): 5 (09-10)
    Pages: 925-943

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    Handle: RePEc:inm:ormksc:v:29:y:2010:i:5:p:925-943

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    Related research

    Keywords: game theory; product augmentation; customer satisfaction; uncertainty; forward-looking behavior; pricing; customer ratings;

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    Cited by:
    1. Bing Jing, 2011. "Seller honesty and product line pricing," Quantitative Marketing and Economics, Springer, vol. 9(4), pages 403-427, December.
    2. Yabing Jiang & Hong Guo, 2012. "Design of Consumer Review Systems and Product Pricing," Working Papers 12-10, NET Institute.

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