Inducing Consumer Online Reviews via Disclosure

Abstract

In this paper, we investigate a seller's voluntary disclosure strategy when serving two groups of consumers who arrive sequentially and are reference dependent with respect to product quality. Consumers may be naive or sophisticated, depending on whether they can make rational inferences from the seller's disclosure behavior and an experienced consumer's quality review. We show that when consumers are naive, the seller can strategically withhold high quality information and disclose low quality information to boost the reference-dependent early adopter's subjective quality review, which in turn enhances the follower's quality expectation and allows the seller to extract more surplus in the second period. However, when consumers are sophisticated, it is difficult for the seller to enhance their quality expectations by designing his disclosure strategy to manipulate the early adopter's quality review. The seller discloses all the quality information to consumers. When the market contains both naive and sophisticated consumers, the seller is able to withhold relatively low quality information in advance. In such a situation, the seller exclusively serves naive customers in the first period by charging a high retail price. The above results are quite robust, regardless of whether the review rating is bounded or whether consumers possess heterogeneous preferences with respect to product quality.

Keywords: Information Disclosure; Reference-Dependent Preferences; Sequential Selling