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Reputational Underpricing

Type

Consumer reviews reflect both product quality and price, with more favorable reviews for a lower-priced product. We study whether this review behavior induces a firm to manipulate reviews by underpricing its product below consumers’ willingness to pay. We introduce a model with a privately informed firm repeatedly selling its product to rational consumers who learn the product quality from past value-based reviews and the current price. We characterize the necessary and sufficient condition for underpricing, which depends on the relative amount of vertical versus horizontal quality differentiation. This condition implies that underpricing need not occur even if the firm is perfectly patient. Rating manipulation via underpricing, when it occurs, unambiguously benefits consumers.