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

Sandro Shelegia and Simon Martin

No 16508, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Quality signaling; Consumer reviews; Reputation; Loss leadership (search for similar items in EconPapers)
JEL-codes: C73 D82 D83 L14 L15 (search for similar items in EconPapers)
Date: 2021-09
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Related works:
Journal Article: Underpromise and overdeliver? - Online product reviews and firm pricing (2021)
Working Paper: Underpromise and overdeliver? – Online product reviews and firm pricing (2019)
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