Information Strategies of New Product Introduction in Vertical Markets
Center for Competition Policy (CCP) Working Paper 17-3
41 Pages Posted: 24 May 2017
Date Written: May 20, 2017
An overwhelming stream of research suggests that online reviews impact firms' profits positively. In this study, we show conditions where this may not hold true. In a vertical market, we identify strategies that a manufacturer can utilize to affect a retailer's attitude towards publicizing consumer reviews. We model a two-period multi-stage game where vertically integrated and separated firms co-exist and choose prices (of old and new products) and product quality (of new products) along with information strategies. We study the extreme situation where new products have no reviews available yet (i.e., only old products have reviews or the possibility of having reviews). Our main findings are that in a separated distribution channel, the manufacturer always benefits from the availability of online reviews, whereas the retailer only benefits if consumer valuation for a new product is sufficiently low. When competition is not too tough and consumer valuation for the new product is not too high, the manufacturer may opt for discounting the wholesale prices to prompt the retailer to post the online reviews. Furthermore, when consumer uncertainty for the new product is sufficiently low, the optimal strategy for the manufacturer is to limit the release of technical information.
Keywords: Channel Relationships, Competitive Analysis, Marketing Strategy, Word-of-Mouth
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