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The Effect of Price on Firm Reputation

Author

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  • Michael Luca

    (Negotiation, Organizations, and Markets, Harvard Business School, Boston, Massachusetts 02163)

  • Oren Reshef

    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

Abstract

Although a business’s reputation can affect its pricing, prices can also affect its reputation. To explore the effect of prices on reputation, we investigate daily data on menu prices and online ratings from a large rating and ordering platform. We find that a price increase of 1% leads to a decrease of 3%–5% in the average rating. Consistent with this, the overall distribution of ratings for cheaper restaurants is similar to that of more expensive restaurants. Finally, these effects do not seem to be driven by consumer retaliation against price changes but by changes in absolute price levels.

Suggested Citation

  • Michael Luca & Oren Reshef, 2021. "The Effect of Price on Firm Reputation," Management Science, INFORMS, vol. 67(7), pages 4408-4419, July.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:7:p:4408-4419
    DOI: 10.1287/mnsc.2021.4049
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    References listed on IDEAS

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    Cited by:

    1. Hui, Xiang & Klein, Tobias & Stahl, Konrad, 2022. "Learning from Online Ratings," CEPR Discussion Papers 17006, C.E.P.R. Discussion Papers.
    2. Christoph Carnehl & Maximilian Schaefer & André Stenzel & Kevin Ducbao Tran, 2022. "Value for Money and Selection: How Pricing Affects Airbnb Ratings," Bristol Economics Discussion Papers 22/771, School of Economics, University of Bristol, UK.
    3. Sandra Rousseau & Machteld Joly & Eline Poelmans, 2024. "Search characteristics, online consumer ratings, and beer prices," Agribusiness, John Wiley & Sons, Ltd., vol. 40(4), pages 804-824, October.

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