Abstract:

With the development of information technology， many consumers will post online reviews after purchasing and experiencing products on e-commerce platforms. A new experience product is any product whose quality cannot be easily assessed ex ante by the firm and by consumers. It is intuitive that the information generated through reviews should help consumers that have not yet experienced the product to better assess the product. Thus， they can buy it at a better time. However， such information is also available to the firm， which can learn from consumer experiences about its own quality. Such information can allow the firm to better price the product. However， both the firm and the consumers learn about the product’s quality for different purposes. Some strategic consumers may also delay purchases through social learning online reviews to free ride on better information about the product’s quality and in anticipation of the firm’s price decrease. On the other hand， the firm may want to adjust their pricing strategies to prevent these consumers from waiting until later when the price drops.In this paper， review information is endogenously generated from consumer reviews， and the informativeness of reviews is determined by the number of online reviews in the first period， which may affect a firm's dynamic pricing strategy. In particular， it is not clear whether and how a firm could exploit the endogenously generated quality information and how it should adjust its pricing strategy. In fact， the main problem of our paper is the quality information updating process formed by strategic consumers who have different prior beliefs through the social learning of online reviews with different review informativeness. Also， whether the reviews provide an incentive for the firm to increase or decrease its price in the second period and， anticipating the firm's strategy， whether more or fewer consumers strategically delay their purchase compared to the no-review case.By constructing a two-period sales model consisting of a monopoly firm， an e-commerce platform， and strategic consumers， consumers have prior beliefs before purchasing the product in the first period. After purchasing and experiencing the product， the consumer posts online reviews on the e-commerce platform based on his perceived quality level. In the second period， the latter consumers update their prior beliefs through social learning and then make purchase decisions， and firms can observe the distribution of reviews to adjust their pricing strategies for new experience products dynamically.When consumers have the lower prior quality of product and the online reviews have good reference effect， the lower-informativeness reviews will make the firm tend to sell more products in the first period； When consumers have the higher prior quality of product and the online reviews have bad reference effect， the low-informativeness reviews incline firms to sell more products in the second period； If consumers have the lower prior quality of product and the online reviews have good reference effect， when online reviews have low informativeness， firm should lowerP_{\mathrm{2}}^{\mathrm{*}}. When user-generated reviews have high informativeness， firm should increaseP_{\mathrm{2}}^{\mathrm{*}}. If consumers have high prior quality of product and the user-generated reviews have bad reference effect， when user-generated reviews have low informativeness， the firm should increaseP_{\mathrm{2}}^{\mathrm{*}}.When online reviews have high informativeness， firm should lowerP_{\mathrm{2}}^{\mathrm{*}}.Contrary to intuition， when the prior quality is slightly lower （or slightly higher） than the average perceived quality， there is a 'distortion effect' on the impact of the review information on the dynamic pricing strategy of the firm， consumers will follow the purchase of others blindly. Contrary to the traditional view， user-generated reviews may reduce consumer surplus. When the prior quality is low and the average perceived quality is higher than the prior quality， the lower -informativeness reviews can lead to a lose-lose situation for both the firm and consumers. Firm profits and consumer surplus decrease at the same time， and the total social welfare will also decrease.

Key words: user-generated reviews, prior quality, review informativeness, social learning, quality information updating, dynamic pricing strategies