Consumer Reviews and Dynamic Price Signaling

34 Pages Posted: 10 Mar 2023 Last revised: 15 Nov 2023

See all articles by Stepan Aleksenko

Stepan Aleksenko

University of California Los Angeles

Jacob Kohlhepp

University of California, Los Angeles (UCLA) - Department of Economics; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: February 12, 2023

Abstract

Pricing decisions are crucial for managing a firm's reputation and maximizing profits. Consumer reviews reflect not only product quality but also a product’s price, with more favorable reviews for low-priced products. We study whether such review behavior can induce firms to manipulate the review process by underpricing their product (below current consumers' willingness to pay). We introduce an equilibrium model with a privately informed firm repeatedly selling its product to uninformed but rational consumers who learn about product quality from past reviews and current prices. We show that underpricing can arise only at low levels of reputation, and then only under a specific condition on consumers' utility shocks distribution, which we fully characterize. Surprisingly, rating manipulation unambiguously benefits consumers, since it operates via underpricing.

Keywords: Consumer Reviews, Reputation, Dynamic Pricing, Price Signaling

JEL Classification: D83, D21

Suggested Citation

Aleksenko, Stepan and Kohlhepp, Jacob, Consumer Reviews and Dynamic Price Signaling (February 12, 2023). Available at SSRN: https://ssrn.com/abstract=4380756 or http://dx.doi.org/10.2139/ssrn.4380756

Stepan Aleksenko (Contact Author)

University of California Los Angeles ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Jacob Kohlhepp

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Chapel Hill, NC
United States

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