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Can online markets attract high-quality products?

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  • Chen, Pu
  • Chen, Yijuan
  • Hu, Xiangting
  • Li, Sanxi

Abstract

We study a firm's choice between online and physical markets with respect to product quality. We analyze two contrasting driving forces: On the one hand, online consumers cannot physically inspect the products prior to purchase. This provides the firm with the incentive to hide low-quality products online. On the other hand, consumer reviews and the larger market size may attract higher qualities to the online market. Using a simple yet flexible framework, we show that the firm's choice of a marketplace can disclose or hide product quality. If marginal cost is convex in quality, the firm's choice will be characterized by a cut-off quality level, below which the firm will choose the online market. If marginal cost is concave in quality, both high-end and low-end qualities may choose the online market, leaving the physical market to intermediate qualities. Overall, we show that consumer reviews can alleviate, but do not eliminate, the “lemons problem”. The pooling result in the case of concave-in-quality marginal cost provides a caveat for empirically testing the effectiveness of online consumer-review mechanisms.

Suggested Citation

  • Chen, Pu & Chen, Yijuan & Hu, Xiangting & Li, Sanxi, 2015. "Can online markets attract high-quality products?," Economic Modelling, Elsevier, vol. 51(C), pages 65-71.
    • Handle: RePEc:eee:ecmode:v:51:y:2015:i:c:p:65-71
    DOI: 10.1016/j.econmod.2015.07.010
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    Cited by:

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    2. Potoglou, Dimitris & Palacios, Juan-Francisco & Feijóo, Claudio, 2015. "An integrated latent variable and choice model to explore the role of privacy concern on stated behavioural intentions in e-commerce," Journal of choice modelling, Elsevier, vol. 17(C), pages 10-27.
    3. Chen, Yijuan & Hu, Xiangting & Li, Sanxi, 2017. "Quality differentiation and firms’ choices between online and physical markets," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 96-132.
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    5. Han, Haipeng & Lien, Donald & Lien, Jaimie W. & Zheng, Jie, 2022. "Online or face-to-face? Competition among MOOC and regular education providers," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 857-881.
    6. Yijuan Chen & Xiangting Hu & Sanxi Li, 2022. "Complementarity between online and offline channels for quality signaling," Journal of Economics, Springer, vol. 135(1), pages 49-74, January.

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