An Economic Analysis of Rebates Conditional on Positive Reviews

39 Pages Posted: 1 Jan 2020

See all articles by Jianqing Chen

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management

Zhiling Guo

Singapore Management University, School of Computing and Information Systems

Jian Huang

Nanjing University of Finance and Economics

Date Written: November 12, 2018

Abstract

Strategic sellers on some online selling platforms have been recently using a conditional-rebate strategy to manipulate product reviews under which only purchasing consumers who post positive reviews online are eligible to redeem the rebate. A key concern for the conditional rebate is that it can easily induce fake reviews which might be harmful to society. We develop a micro-behavioral model capturing consumers' review-sharing benefit, review-posting cost, and moral cost of lying to examine the seller's optimal pricing and rebate decisions. We derive three equilibria: the no-rebate, authentic-review equilibrium, the low-rebate, boosted-positive-review equilibrium, and the high-rebate, fake-review equilibrium. We find that the seller's optimal price and rebate decisions critically depend on both review-posting cost and moral cost. The seller adopts the no-rebate strategy when the review-posting cost is low but the moral cost is high, the low-rebate strategy when the review-posting cost is high or when review-posting cost is intermediate and the moral cost is high, and the high-rebate strategy when the review-posting cost is not too high and the moral cost is low. Our results suggest that it is not always profitable for strategic sellers to adopt the conditional-rebate strategy. Even if the conditional-rebate strategy is adopted, it does not always result in fake reviews. Furthermore, we find that when a low (high) rebate is offered, if the review-posting cost is not too high (very low), the conditional-rebate strategy can even lead to higher social welfare than a benchmark with no rebate. Our findings shed new light on the online-platform policy debate about the fake-review phenomenon induced by conditional rebates.

Keywords: fake reviews, review manipulation, online reviews, rebates

JEL Classification: L81

Suggested Citation

Chen, Jianqing and Guo, Zhiling and Huang, Jian, An Economic Analysis of Rebates Conditional on Positive Reviews (November 12, 2018). Available at SSRN: https://ssrn.com/abstract=3503078 or http://dx.doi.org/10.2139/ssrn.3503078

Jianqing Chen (Contact Author)

The University of Texas at Dallas, Jindal School of Management ( email )

800 West Campbell Road
Richardson, TX 75080
United States

Zhiling Guo

Singapore Management University, School of Computing and Information Systems ( email )

80 Stamford Road
Singapore, 178902
Singapore

Jian Huang

Nanjing University of Finance and Economics ( email )

Nanjing
China

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