Underpromise and overdeliver? - Online product reviews and firm pricing |
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| Institution: | 1. Düsseldorf Institute for Competition Economics (DICE), University of Düsseldorf, Germany;2. Universitat Pompeu Fabra, Barcelona School of Economics, and CEPR;1. Stanford Graduate School of Business, SIEPR and NBER, USA;2. Stanford University, USA;1. WHU – Otto Beisheim School of Management, Chair of Organizational Theory, Burgplatz 2, Vallendar 56179, Germany;2. Ulm University of Applied Sciences, Faculty of Mathematics, Natural and Economic Sciences, Prittwitzstr. 10, Ulm 89075, Germany;3. WHU – Otto Beisheim School of Management, Burgplatz 2, Vallendar 56179, Germany |
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| 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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