Analysis of firm's pricing strategy with online reviews based on signaling game model

Abstract

This paper develops a quality-signaling game-theoretical model to examine whether an informed reviewer truthfully conveys the quality level (high or low) of an experience good to another uninformed consumer via reviews and whether the firm has motivations to reveal the quality information by price. With the perfect Bayesian equilibria, we obtain mainly the following results. First, the informed reviewer always leaves an honest review because it may bear a moral cost for writing a fake review. Second, when the marginal cost of the low-quality product is higher enough, the firm pools the price of its product at the consumer's expected value, and the uninformed consumer obtains the true quality level only from the review. Third, in the case of the lower marginal cost of the low-quality product, the true quality level is revealed to the uninformed consumer by the firm's separating pricing strategy associated with the reviewer's honest review. Fourth, the uninformed consumer can always get true quality information through either firm's separating pricing strategy or the reviewer's honest review.