Supplier’s pricing strategy in the presence of consumer reviews

Abstract

We study the supplier’s optimal pricing strategy in the existence of consumer reviews and retailer’s strategic inventory. While the retailer may offer a low introductory price to attract more consumer reviews, how the supplier should manage its wholesale price in the presence of consumer reviews remains a question. We consider a supply chain model where consumers arriving later will update their beliefs about product quality from the reviews given by earlier consumers. We find that supplier’s optimal wholesale price may decrease in the product quality. Also when consumers’ likelihood to write reviews changes, the supplier should change its wholesale price aiming at improving consumer reviews rather than controlling retailer’s inventory. Finally, the retailer’s ability to carry inventory can alleviate the double marginalization effect even in the presence of consumer reviews. Our results provide guidance for the supplier to manage its wholesale price strategy when faced with consumer reviews and retailer’s strategic inventory.