Quality and Pricing Decisions in a Market with Consumer Information Sharing

Jiang B, Yang B (2017) "Quality and Pricing Decisions in a Market with Consumer Information Sharing," Management Science, Forthcoming

50 Pages Posted: 18 Oct 2015 Last revised: 14 Mar 2018

See all articles by Baojun Jiang

Baojun Jiang

Washington University in Saint Louis - John M. Olin Business School

Bicheng Yang

Washington University in St. Louis - John M. Olin Business School

Date Written: August 20, 2017

Abstract

We provide a dynamic, game-theoretic model to examine a firm’s quality and pricing decisions for a new experience good. Early consumers do not observe product quality prior to purchase but can learn it after purchase and share that product-quality information with later consumers, for example, through online reviews. Both the firm’s quality decision and its cost efficiency are the firm’s private information and not directly observed by the consumer. The early consumers can make a rational inference from the firm’s price about its cost and quality taking into account the firm’s profit incentive from the later informed consumers. We find that in equilibrium a more cost-efficient firm chooses higher quality than does an inefficient firm. One might intuit that a firm will offer higher quality if its high efficiency is known to consumers than if its efficiency is not known, because it will no longer need to convince consumers that it is not the inefficient firm. Our analysis shows that, surprisingly, the opposite may be true — when a firm’s high efficiency is publicly known, the firm may reduce its product quality rather than increase it. Furthermore, consumers’ knowledge about the firm’s cost efficiency can reduce the consumer surplus. We also show that an improvement in the average cost efficiency in the market can lower the consumer surplus.

Keywords: Asymmetric information, signaling, moral hazard, social learning, experience goods, quality, pricing

JEL Classification: D42, D82, L15

Suggested Citation

Jiang, Baojun and Yang, Bicheng, Quality and Pricing Decisions in a Market with Consumer Information Sharing (August 20, 2017). Jiang B, Yang B (2017) "Quality and Pricing Decisions in a Market with Consumer Information Sharing," Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2675336 or http://dx.doi.org/10.2139/ssrn.2675336

Baojun Jiang (Contact Author)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States
3149353315 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/Jiang/

Bicheng Yang

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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