Frills and product pricing with online reviews

We investigate the frill and price decisions for a competitive e-market with online reviews. To do this, we develop two-period game-theoretical models for the constructed different frill scenarios, respectively. By comparing the equilibrium decisions, we determine the optimal frill and price strategies. We find that: (1) The high-quality retailer will always offer frills to consumers, however, the low-quality retailer offers frills only when its frills have low effectiveness; (2) Offering frills to consumers will increase the two retailers' profits, when there is a small quality difference and low effectiveness of frills; (3) Intuitively, a low-quality retailer would offer more frills to improve its online reputation. However, from our result, retailers might spend more resources promoting superior products in a competitive context; (4) Better online reviews entailed by the offered frills will encourage retailers to raise their respective product prices.

Automated summary

The study shows that in a competitive e-market, retailers' price and frill decisions are influenced by online reviews. Offering frills to consumers can increase profits when there is a small quality difference and low frill effectiveness. However, in a competitive context, retailers may focus more on promoting superior products rather than offering more frills.