To commit or not? The impact of online reviews on retailers' price commitment strategy in competing supply chains

Abstract

AbstractOnline reviews can effectively mitigate consumers' uncertainty about product valuations, thus affecting firms' pricing decisions. This paper develops a two‐period game model to investigate the impacts of online reviews on the retailer's price commitment strategies in two competing supply chains, each consisting of one manufacturer and one retailer. In the first period, the retailers strategically set prices and decide whether to commit to prices for their products. In the second period, the retailers adjust product prices in response to online reviews, if they choose not to commit to a price. We show that the retailers' price commitment strategies depend on consumers' perceived uncertainty about product valuations, the information value of online reviews and the unit misfit cost. Interestingly, the retailers can benefit from the information value of online reviews by implementing flexible pricing strategies. Furthermore, if the information value of online reviews is sufficiently high, both retailers will choose not to commit to a price in equilibrium. However, if the information value of online reviews is relatively low, the equilibrium in price commitment is asymmetric, that is, the retailer A commits to a price and its competitor chooses not to commit.