The Role Of Product Price And Consumer Reviews In Signaling Product Quality

With the rapid development of Internet technology,the information collection and acquisition channels for consumers in online shopping are more diverse and varied.Consumers may mainly rely on the price announced by firms to infer the product quality or may also refer to consumer reviews provided by other purchasers to reduce information asymmetry.Therefore,it is necessary to jointly explore the roles of product price and consumer reviews in signaling product quality in product sales.However,due to the characteristics of being unpaid,anonymous and easy-to-operate,the e-commerce rating and reputation system is facing two prominent issues regarding the existence and authenticity of consumer reviews: The number of reviews is relatively small and fake reviews are prevalent.The reasons for these two issues usually trace back to lower review payments(i.e.,net review benefits)and firms’ review manipulation.In view of this,it is of practical significance to further investigate the quality-signaling role of product price and consumer reviews considering review payment and review manipulation separately and jointly.Literature review shows that the study of price as a single signaling tool is well established,but there is a little research on examining the quality-signaling role of product price and consumer reviews in a game-theoretical model with incomplete quality information.In addition,the existing literature on the role of consumer reviews in signaling information and firms’ review manipulation,on the one hand,is mainly empirical? on the other hand,most of the relevant theoretical studies assume that reviewers are nonstrategic,in other words,consumer reviews are exogenous.Therefore,the existing research cannot fully answer the following two questions: How do product price and consumer reviews play the quality-signaling role in the strategic interaction among the firm,reviewers and potential consumers? And what is the relationship between these two signals?This dissertation employs quality-signaling game models to address above questions.Firstly,a benchmark model involving price and consumer reviews in the context of the firm with private quality information is built.The sequence of events are as follows:Initially,the firm announces a price to sell the product to two homogeneous consumers who differ in their arrival time(an early-arriving and a late-arriving consumer)? Subsequently,if the early-arriving consumer chooses to purchase(and become a reviewer),he decides a review strategy that may reveal the product quality information to the latearriving consumer? Finally,if the late-arriving consumer chooses to purchase and discovers the reviewer’s fake review,he subsequently imposes a positive reputation cost on the reviewer.The model endogenously characterizes the firm’s strategic pricing and the reviewer’s strategic review,explores the role of reputation costs of fake reviews,gives the market conditions under which product price and consumer reviews can signal product quality,reveals price and review signal transmission mechanism and the relationship between them,and examines the impact of introducing reviews on relevant interest groups(Chapter 3).Further,this dissertation extends the basic model in various market environments,including the case with only review payment but without firm’s review manipulation(Chapter 4),the case with firm’s review manipulation but without review payment(Chapter 5),and the case both with review payment and firm’s review manipulation(Chapter 6),respectively.Meanwhile,the dissertation examines the market conditions and the signaling mechanism under which price and reviews can signal product quality and explores the relationship between these two signals.The main conclusions are as follows.1.In the case where neither review payment nor review manipulation is considered:Firstly,reputation costs prevent the reviewer from leaving fake reviews,the reviewer only writes a truthful review.Secondly,the market condition that price cannot but reviews can(both price and reviews can)signal the product quality depends on a large(small)quality difference between high-quality and low-quality products.Finally,compared to the noreview case,introducing consumer reviews makes the firm(consumers)worse(better)off and lowers social welfare(the sum of firm’s profit and consumer surplus).2.In the case where only review payment is considered: Firstly,reputation costs prevent the reviewer from posting fake reviews,the reviewer may provide a truthful review or leave nothing.Secondly,the market condition that neither price nor reviews can signal the product quality requires negative review payments in both quality states.At least consumer reviews can reveal the product quality when market conditions about quality difference and nonnegative review payments in either quality state are satisfied.3.In the case where only review manipulation is considered: Firstly,the reputation cost prevents the reviewer from leaving a negative fake review.Secondly,the condition that neither price nor reviews(both price and reviews)can signal the product quality is that the quality difference is large(small)enough.The conditions that price cannot but reviews can reveal the quality is that the quality difference is moderate and the unit reputation cost of positive fake reviews is higher.Thirdly,only the low-quality firm has motivations to manipulate reviews.Finally,the conclusion that introduction of consumer reviews makes the firm(consumers)worse(better)off and lowers social welfare still holds.4.In the case where both review payment and review manipulation are considered:Firstly,the reputation cost prevents the reviewer from posting negative fake reviews.Secondly,whether product price and consumer reviews can play the quality-signaling role depends on the conditions on both product quality difference and review payment.Finally,both high-quality and low-quality firms have motivations to manipulate reviews but with different purposes.The former aims to encourage reviewers to leave(truthful)reviews while the latter attempts to induce reviewers to write positive fake reviews.The results for all four cases above indicate that consumer reviews signal product quality is a necessary but not sufficient condition for price to reveal quality,while price signals product quality is a sufficient but not necessary condition for reviews to reveal quality information to consumers.In other words,consumer review is the information supplement for price signal in the sense of signaling product quality.In summary,there are four main contributions in the following: 1.This dissertation models endogenous consumer reviews as a signaling strategy,which complements the signal-jamming literature where truthful reviews are assumed to be exogenous.2.This dissertation reveals the signaling mechanism of both product prices and consumer reviews under various operational conditions,providing theoretical support for empirical studies about motivations for posting reviews and informativeness of consumer reviews,and enriching the theoretical studies using price as a signal of product quality.3.This dissertation furnishes the conditions under which firm’s review manipulation can/cannot affect the quality-signaling role of consumer reviews,the characteristics and motivations of the firm who manipulates reviews and the reviewer who involves in manipulation,and the optimal monetary payment of the manipulating firm,providing theoretical justifications for empirically explored firms’ and reviewers’ features and market settings in terms of manipulating reviews.4.This dissertation points that consumer review is the information supplement for price signal in the sense of signaling product quality,extending the existing theoretical studies on conveying quality information through two signals.