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

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  • Shelegia, Sandro
  • Martin, Simon

Abstract

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.

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  • Shelegia, Sandro & Martin, Simon, 2021. "Under-promise and Over-Deliver? - Online Product Reviews and Firm Pricing," CEPR Discussion Papers 16508, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16508
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    Cited by:

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    2. Belleflamme, Paul & Johnen, Johannes, 2023. "Non-Price Strategies of Marketplaces: A Survey," LIDAM Discussion Papers CORE 2023015, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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    More about this item

    Keywords

    Quality signaling; Consumer reviews; Reputation; Loss leadership;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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