Abstract
In markets with asymmetric information, it is crucial for sellers to establish a reputation. An important strategy for sellers to build a reputation is to practice introductory pricing, i.e. to offer their products at a lower price to increase demand and thus induce more buyers to provide feedback. In this study, I look at a particular form of introductory pricing, namely offering products for free. I show that giving away free products to build a reputation can be a double-edged strategy. It does not only attract buyers with a high preference, but also buyers with a low preference. Low-preference buyers give worse feedback, resulting in a negative selection effect on a seller's reputation. I estimate the strength of this effect using data from an online self-publishing platform where I observe independent e-book authors either selling their e-books at a price or giving them away as free content. By using the fact that I can observe both online ratings for free and purchased versions of the same e-book, I show that those reviewers who obtain an e-book as free content rate it worse than reviewers who buy it at a positive price, consistent with a negative selection effect on reputation. However, the effect is weaker for female reviewers, consistent with female reviewers reciprocating free content by giving better ratings.
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