Price Signaling and Reputation Building: Evidence from a Consulting Platform

51 Pages Posted: 20 Apr 2022 Last revised: 15 Jun 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

Earning a good reputation is crucial for the survival of new firms on online retailing and service platforms. With a dynamic price signaling model, we show that a high-quality firm can signal its unobserved quality by setting a lower introductory price than its low-quality counterpart. After accumulating sufficient favorable reviews, the high-quality firm will raise its price and enjoy a quality premium. Using data from Zaihang, a consulting service platform, we find empirical evidence that experts with high unobserved ability indeed adopt low introductory prices and exhibit a rising price dynamic over time. We use the performance of the expert on another platform as an instrument for the expert's ability on Zaihang to provide evidence that the relationship is causal. Our empirical findings reject alternative models in which firms do not know their own types, or consumers can observe firm types.

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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