Reviews, Prices and Endogenous Information Transmission

Luciana Nicollier

No 270430, Economic Research Papers from University of Warwick - Department of Economics

Abstract: Empirical evidence suggests that online reviews are an important source of consumers information and a relevant determinant of the firms revenues. Little is known, however, about how prices and reviews affect each other. This paper proposes a dynamic game to investigate this relationship. A long-lived monopoly faces a sequence of short-lived consumers whose only information about the value of an experience good is the one contained in the reviews completed by previous buyers. Neither the monopoly nor the consumers have private information about the value of the good. After buying the good, the consumers observe a quality realisation that is correlated with the actual value of the good and decide whether to complete reviews. The consumers complete reviews according to a social rule that maximises the present value of current and future consumers utility. It is shown that a necessary condition for the existence of reviews is that the firm cannot fully appropriate the surplus generated by this increased information. Furthermore, the reviews induce a mean preserving spread on the posterior beliefs about the value of the good which, combined with the convexity with respect to the prior of the indirect utility and profit functions, implies that reviews are valuable for both the consumers and the firm. Hence, both parties are willing to face some cost in order to increase the information available in the market. The main result of the paper is that, from the firm’s perspective, this cost takes the form of a discount in the price offered to current consumers.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 1029
Date: 2013-03-15
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://ageconsearch.umn.edu/record/270430/files/twerp_1029__nicollier.pdf (application/pdf)
https://ageconsearch.umn.edu/record/270430/files/t ... r.pdf?subformat=pdfa (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:uwarer:270430

DOI: 10.22004/ag.econ.270430

Access Statistics for this paper

More papers in Economic Research Papers from University of Warwick - Department of Economics
Bibliographic data for series maintained by AgEcon Search ().