Competitive Pricing in the Presence of Manipulable Information in Online Platforms

52 Pages Posted: 10 Jun 2023 Last revised: 13 Jan 2024

See all articles by Harish Guda

Harish Guda

Arizona State University

Yuqi Yang

Arizona State University (ASU)

Hongmin Li

Arizona State University (ASU)

Date Written: May 29, 2023

Abstract

Problem Definition: To entice customers to purchase, sellers on online platforms often misrepresent the quality of their goods/services, e.g., by manipulating consumer opinion. We analyze an oligopoly where sellers, heterogeneous in their true quality, compete by jointly choosing their prices and the extent of manipulation.

Methodology: Non-Cooperative Game Theory, Choice Models, and Optimization.

Results: We solve for the unique equilibrium when price-setting firms can manipulate their perceived quality and characterize the set of sellers that manipulate in equilibrium. We identify an index called the propensity to manipulate, based on model primitives to identify the set of sellers who have greater incentive to manipulate, and show that the set of sellers that manipulate in equilibrium is upward-closed in the propensity to manipulate. The extant literature has been mixed in its findings on which sellers have greater incentive to manipulate. Our work helps reconcile the differing viewpoints in the extant literature by providing a unified perspective.

Managerial Implications: We demonstrate the practical relevance of our model by mapping it to an environment consisting of sellers who are differentiated in a star-rating system based on their true rating and the volume of ratings. Depending on a seller’s rating and volume of ratings, we identify three distinct regions that arise: a cost-prohibitive region, a cost-dominant region, and a benefit-dominant region. The ability to map a seller to one of these regions allows platform managers to understand a seller’s tendency to manipulate consumer opinion dynamically over time.

Keywords: Pricing, Manipulation, Multinomial Logit

JEL Classification: D20, D43, D11

Suggested Citation

Guda, Harish and Yang, Yuqi and Li, Hongmin, Competitive Pricing in the Presence of Manipulable Information in Online Platforms (May 29, 2023). Available at SSRN: https://ssrn.com/abstract=4461597 or http://dx.doi.org/10.2139/ssrn.4461597

Harish Guda (Contact Author)

Arizona State University ( email )

Tempe, AZ
United States

Yuqi Yang

Arizona State University (ASU) ( email )

Hongmin Li

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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