Rising or Dropping: the Consumer Review-oriented Pricing Paradox

Product pricing strategy and online word-of-mouth both influence consumer purchase. There have been increasing interests and conflict results on how to optimize seller’s pricing strategy in dealing with the interaction between price, consumer review, and sales. We focus on the early stage of product sales and develop a two-stage economic model. We find that the product type, that is, whether the product is horizontally differentiated or vertically differentiated, as well as the discrepancy between the expected and actual product quality/features play important roles in pricing, which lead to two opposite optimal pricing strategies, i.e., to set a high vs. low price in the initial stage to attract favorable consumer reviews. We obtain data from an online market and our empirical findings confirm our theoretical projections. Our research contributes to the literature of optimal pricing strategy under the influence of social media. It may help direct companies’ practice in strategic pricing.