A Signaling Theory of the Online Consumer Review Policy

Abstract

In this paper, we consider a two-period model of an experience good with a seller (informed player) and a consumer (uninformed player) in each period. In the model, we examine the seller’s decision about offering refunds for online reviews of his products, and each period consumer’s purchasing decision together with the first period consumer’s reviewing decision. Our main interest is whether a high-quality product seller offers a high amount or a low amount of cashback for an online review. We show that a lenient cashback policy for a review can be a signal of high quality of the product. Intuitively, a high-quality seller can offer a higher amount of cashback to a consumer who reviews, whether the review is positive or negative. This separation is possible mainly due to a difference in the second-period profits across types. We also briefly discuss the effect of the conditional review policy fostering fake reviews.