Competitive Pricing in the Presence of Manipulable Information in Online Platforms

To entice customers to purchase, sellers on online platforms often misrepresent the quality of their goods/services, e.g., by manipulating consumer opinion. We analyze an oligopoly where sellers, heterogeneous in their true quality, compete by jointly choosing their prices and the extent of manipulation. The extant literature has been mixed in its findings on which sellers have greater incentive to manipulate. We construct a model of multi-seller competition where each seller chooses their joint pricing and manipulation strategy. We make several unique contributions. We solve for the unique equilibrium when price-setting firms can manipulate their perceived quality and characterize the set of sellers that manipulate in equilibrium. We identify an index, called the propensity to manipulate, based on model primitives to identify the set of sellers who have greater incentive to manipulate, and show that the set of sellers that manipulate in equilibrium is upward- closed in the propensity to manipulate. We demonstrate the practical relevance of our model by mapping it to an environment consisting of sellers who are differentiated based on their true rating and the volume of ratings. Our work helps reconcile the differing viewpoints in the extant literature by providing a unified perspective. We provide insights for platform managers that monitor seller manipulation.