Nicollier, Luciana A. (2013) Reviews, prices and endogenous information transmission. Working Paper. Coventry, UK: Department of Economics, University of Warwick. Warwick economics research papers series (TWERPS), Volume 2013 (Number 1029).

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Abstract

Empirical evidence suggests that online reviews are an important source of consumers
information and a relevant determinant of the firms revenues. Little is known, however,
about how prices and reviews affect each other. This paper proposes a dynamic game
to investigate this relationship. A long-lived monopoly faces a sequence of short-lived
consumers whose only information about the value of an experience good is the one
contained in the reviews completed by previous buyers. Neither the monopoly nor the
consumers have private information about the value of the good. After buying the good,
the consumers observe a quality realisation that is correlated with the actual value of the
good and decide whether to complete reviews. The consumers complete reviews according
to a social rule that maximises the present value of current and future consumers utility.
It is shown that a necessary condition for the existence of reviews is that the firm cannot
fully appropriate the surplus generated by this increased information. Furthermore, the
reviews induce a mean preserving spread on the posterior beliefs about the value of the
good which, combined with the convexity with respect to the prior of the indirect utility
and profit functions, implies that reviews are valuable for both the consumers and the
firm. Hence, both parties are willing to face some cost in order to increase the information
available in the market. The main result of the paper is that, from the firm's perspective,
this cost takes the form of a discount in the price offered to current consumers.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Consumer satisfaction , Internet , Prices , Consumption (Economics) , Game theory, Monopolies
Series Name:	Warwick economics research papers series (TWERPS)
Publisher:	Department of Economics, University of Warwick
Place of Publication:	Coventry, UK
Official Date:	March 2013
Volume:	Volume 2013
Number:	Number 1029
Number of Pages:	27
Status:	Not Peer Reviewed
Publication Status:	Published

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