Working Paper: CEPR ID: DP16508
Authors: Sandro Shelegia; Simon Martin
Abstract: We consider a signaling model capturing the introductory and the mature phase of a product. Information concerning product quality is transmitted between consumers through reviews, which partially depend on the expectations consumers had prior to their purchase. When future sales are sufficiently important, a novel tension arises: High-quality types may want to underpromise and overdeliver by imitating low types in order to get a better review. We show the existence of a Pareto-improving separating equilibrium. Both more informative reviews and price transparency can lead to higher prices. Our analysis reveals a new rationale for loss-leadership.
Keywords: quality signaling; consumer reviews; reputation; loss leadership
JEL Codes: C73; D82; D83; L14; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high-quality firms (L15) | favorable reviews (Y30) |
| pricing strategies (D49) | consumer expectations (D84) |
| consumer expectations (D84) | favorable reviews (Y30) |
| more informative reviews (Y30) | higher prices (D49) |
| price transparency (P22) | higher prices (D49) |
| higher introductory prices (Y20) | increased expectations (D84) |
| increased expectations (D84) | negative review outcomes (Y30) |
| review informativeness (Y30) | pricing strategies (D49) |