Price Effects in Online Product Reviews: An Analytical Model and Empirical Analysis

We apply backward induction to derive optimal price functions. In the second period, given first period price p 1 , the firm selects second period price p 2 (p 2 < Max{q, R}) to maximize its second period profit: The profit function can be reduced to four possibilities based on the value of p 1 : By maximizing profit in each of the four cases, we can derive the optimal second period price p 2 as a function of first period price p 1 :