The Quality-Signaling Role of Manipulated Consumer Reviews

Abstract

We develop a quality-signaling game model to characterize a firm that produces an experience good with private quality information and chooses either a separating or pooling pricing strategy to sell the product to both early-arriving and late-arriving consumers. The firm endogenously determines whether to manipulate early-arriving consumers’ reviews to influence late-arriving review-conscious consumers. We show the existence of multiple perfect Bayesian equilibriums (PBEs) and select the PBEs with the maximum ex ante expected profit. Based on the selected PBEs, we first establish the conditions under which the firm chooses the pooling pricing strategy but succeeds (fails) in manipulating early-arriving consumers to leave positive fake reviews on product quality. We also furnish the conditions under which the firm adopts the separating pricing strategy to truthfully reveal its private quality information, thereby ruling out the possibility of fake reviews. Second, by comparing the cases with and without consumer reviews, we explore how consumer reviews affect the welfare of the firm, consumers, and society. Third, we examine how the firm’s profitability, consumer surplus, and social welfare vary with two key market parameters, the unit reputation cost of positive fake reviews and the probability that late-arriving consumers are review-conscious. Managerial insights are garnered on how the firm should price its product and whether it should manipulate consumer reviews as well as how consumer review manipulation should be regulated under different market conditions.