Deterring Sellers’ Cheap Talk Actions via Online Rating Schemes

Abstract

This paper develops a two-period game theoretic model to investigate a seller’s quality claims in a cheap-talk setting. In this model, consumers are reference-dependent with respect to product quality, and consumers who have purchased items can share their quality assessments via online ratings; additionally, consumers may be naive or experienced: naive consumers simply believe the quality claims and quality assessments, whereas experienced consumers can accordingly make rational quality inferences. We find that, in the scenario with only naive consumers, when the reference effect is weak, the seller will always claim the highest quality; when the reference effect is strong, the low-quality seller will claim the highest quality, whereas the high-quality seller will understate its products’ quality. In the scenario with only experienced consumers, the seller will claim some moderate quality levels. In the scenario with both types of consumers, in period one, the low-quality seller will always claim some moderate quality levels to serve both types of consumers, whereas the high-quality seller will claim the highest quality when the reference effect is extremely weak and thus serve only naive consumers, or it will adopt truth-telling otherwise; in period two, the low-quality seller will charge a higher price to serve only experienced consumers, whereas the high-quality seller will charge a lower price to serve both types of consumers.