Should a better-informed manufacturer hold pricing power for the direct channel: The role of consumer reviews

Abstract

Manufacturers can effectively obtain precise demand information through the utilization of data analysis technologies. These better-informed manufacturers commonly distribute their products not only through traditional offline retailers but also via direct sales channels. In this context, distinct pricing strategies for online channels, namely holding pricing power and giving up pricing power, can be observed in practice. Furthermore, these online channels also enable consumers to post consumer reviews, which significantly impacts consumers’ purchasing decisions. By applying a signaling game, our study examines the interaction between pricing strategy of a direct sales channel and consumer reviews. Our findings indicate that consumer reviews significantly influence the determination of the optimal pricing strategy of direct channel for a better-informed manufacturer. Holding pricing power is always the optimal strategy when the direct channel functions as an authentic distribution channel. However, giving up pricing power can be optimal when the direct channel personates a competitive threat, conditional on the travel cost of traditional channel and the information disclosed through consumer reviews. Contrary to expectations, manufacturer’s retention of pricing power for the direct channel can benefit the retailer when the travel cost to the traditional channel is moderate and the information disclosed in consumer reviews does not exhibit extreme negativity or positivity. Additionally, our findings indicate that the chain members can acquire an agreement on the direct channel’s pricing strategy, which results in a win-win outcome, thereby improving supply chain efficiency.