Persuading Skeptics and Fans: Information Design for New Experience Goods

Abstract

The advent of social media platforms has enabled firms to disseminate information to their customers via new channels. A prominent example of this phenomenon is firms using online reviews from expert opinion leaders to inform customers about the quality of new experience goods. As customers rely heavily on these reviews before making a purchase decision, some firms selectively offer their new products to experts and solicit their reviews before launching the products in the market. By choosing which experts to solicit reviews from, these firms can control how to disseminate product quality information publicly to a market of regular customers who might have differing initial opinions about the quality. Beyond reading these solicited reviews, customers can acquire additional information about quality from sources outside the firm's reach. Motivated by this phenomenon, we consider the information design problem of a firm launching a product of unknown quality to a polarized market consisting of customers who have heterogeneous prior beliefs about quality and can acquire additional information at a cost. We construct a game-theoretic model of Bayesian persuasion between firm and customers. We characterize the firm's optimal information policy and show that the firm might exaggerate the quality or release incomplete information depending on the market characteristics. Furthermore, we analyze the effect of customers acquiring additional information on the informativeness of the firm's policy, the firm's expected demand, and the customers' expected utility. Our results highlight that customers' acquisition of additional information can make both firm and customers worse off.

Keywords: Product reviews, information design, polarization, information acquisition

JEL Classification: D81, D83, M11, M39