An Economic Analysis of Rebates Conditional on Positive Reviews

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