Price Signaling and Reputation Building: Evidence from a Consulting Platform

70 Pages Posted: 20 Apr 2022 Last revised: 29 Sep 2022

See all articles by Yangguang Huang

Yangguang Huang

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Chenyang Li

Cornell University

Si ZUO

Cornell University

Date Written: April 1, 2022

Abstract

To build a reputation on online platforms, new firms need to accumulate reviews through sales and consider the corresponding pricing strategy. We construct a dynamic model with both price signaling and a review-based reputation system. A high-quality firm can signal its unobserved quality by setting a lower introductory price than that of a low-quality firm because the high-quality firm benefits more from accumulating reviews in early periods. Using data from Zaihang, a service platform, we find empirical evidence that experts with high unobserved ability indeed adopt low introductory prices. We use an expert's performance on another platform as an instrument for the expert's ability to provide evidence for the causal relationship. The price and sales dynamics in the data are also consistent with the model predictions. The platform can accelerate quality revelation by facilitating price signaling. To do so, platforms could make price comparison easier and provide training to new firms about signaling.

Keywords: asymmetric information, price signaling, reputation system, online platform

JEL Classification: D4, L15, L86

Suggested Citation

Huang, Yangguang and Li, Chenyang and ZUO, Si, Price Signaling and Reputation Building: Evidence from a Consulting Platform (April 1, 2022). HKUST Business School Research Paper No. 2022-062, Available at SSRN: https://ssrn.com/abstract=4080448 or http://dx.doi.org/10.2139/ssrn.4080448

Yangguang Huang (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Chenyang Li

Cornell University ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
6087720191 (Phone)
14850 (Fax)

HOME PAGE: http://https://www.chenyang-li.com/

Si ZUO

Cornell University ( email )

Ithaca, NY
United States

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