Larger number of reviews or higher rating? The firm’s pricing and quality disclosure strategies on the online platform

Considering two common dimensions of online reviews, number of reviews and rating, this paper investigates the impacts of online reviews on the firm’s pricing and quality disclosure strategies when selling the product through an online platform’s agency or resell scheme. By setting up a two-period model, we find that the first-period retail price decreases in the presence of online reviews and the degree of the first-period retail price cut is greater when consumers assign a higher weight to the number of reviews. However, the second-period retail price does not necessarily increase in the presence of reviews, depending on realized number of reviews and rating. The firm chooses to disclose its quality when the quality is above a threshold under two selling schemes, and the quality disclosure threshold decreases with the weight that consumers assign to the rating under the resell scheme, whereas it increases with the weight to the rating under the agency scheme. The existence of online reviews may stimulate or inhibit the firm’s incentive to disclose product quality, depending on the consumer’s weight on the two dimensions and the selling scheme. Finally, the firm and the platform come to an agreement on the agency scheme when the commission rate is relatively low, leading to a win–win scenario, and the win–win scenario is more likely associated with less quality information disclosure. We also consider the endogenous correlation between the rating and true product quality in the extension to check the robustness of the results.