Building an Online Reputation with Free Content: Evidence from the E-Book Market
38 Pages Posted: 25 Mar 2016 Last revised: 22 Apr 2017
Date Written: April 21, 2017
An important strategy for sellers to build a reputation is to practice introductory pricing. By selling at a lower introductory price, sellers increase demand, induce more buyers to provide feedback, and thus build a reputation more quickly. I examine a form of introductory pricing that is particularly popular in digital markets: offering digital content for free. I argue that offering free content to build a reputation can be a double-edged strategy. It does not only attract buyers with a high preference, but also buyers with a low preference. Low-preference buyers give worse feedback than high-preference buyers, inducing a negative selection effect on a seller's reputation. I estimate the strength of this effect using data from an online self-publishing platform where I observe authors either selling their e-books at a price or giving them away as free content. By exploiting the fact that I observe ratings for free and purchased versions of the same e-book, I show that those buyers who obtain an e-book as free content rate it worse than those buyers purchasing the e-book at a positive price, consistent with a negative selection effect on reputation.
Keywords: Online Reputation, Ratings, Free Products
JEL Classification: L86, M31, D82
Suggested Citation: Suggested Citation