Manipulation for Competition: Agency Pricing in the Presence of Promotional Reviews
Posted: 14 Jul 2017 Last revised: 20 Jan 2019
Date Written: July 6, 2017
The past decade witnessed an explosive growth of firm-initiated fake product reviews in online platforms. We develop an analytical model to investigate the effects of review manipulation under the agency pricing regime, wherein manufacturers compete along prices and review manipulation. A unique feature of our model is the product-return effect: Consumers might be misled by the manipulated quality information at the pre-purchase stage, but they can assess the quality more accurately after having purchased the product. Therefore, a systematic discrepancy between actual quality and perceived quality caused by review manipulation might lead to more product returns. We find that as the common cost of manipulation increases, the manipulation level of the high-quality manufacturer decreases but the manipulation level of the low-quality manufacturer may increase. The reason is that the indirect competition effect can dominate the direct cost effect for the low-quality manufacturer, but it is never the case for the high-quality manufacturer. Therefore, a stricter anti-review-manipulation strategy may incentivize the low-quality manufacturer to conduct a higher level of manipulation. We also find that adopting a more lenient product return policy might be a more effective strategy to deter review manipulation of the low-quality manufacturer than increasing the cost of manipulation. This study should interest practitioners, as the results highlight the interaction between review manipulation and product returns.
Keywords: promotional reviews, wholesale pricing, agency pricing, manipulation
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