Building an Online Reputation with Free Content: Evidence from the E-book Market

Abstract

An important strategy to build a reputation in markets with asymmetric information is to practice introductory pricing. By selling their product at a lower introductory price, sellers can increase demand, induce more buyers to provide feedback, and thus build a reputation more quickly. I examine a form of introductory pricing that is particularly popular in digital markets, namely offering free content to consumers. I argue that offering free content to build a reputation can be a double-edged strategy. It does not only attract buyers with a high preference, but also buyers with a low preference for the product. Low-preference buyers give worse feedback, resulting in a negative selection effect on a seller's reputation. I estimate the strength of this effect using data from an online self-publishing platform where I observe independent e-book authors either selling their e-books at a price or giving them away as free content. By exploiting the fact that I observe ratings for free and purchased versions of the same e-book, I show that those consumers who obtain an e-book as free content rate it worse than reviewers who buy it at a positive price, consistent with a negative selection effect on reputation.

From Publishers to Self-Publishing: Disruptive Effects in the Book Industry

“…Strategies authors might employ to attract attention, such as setting very low or even zero prices, may well backfire because readers search less carefully when the book is (almost) free and hence the match between author and book is, on average, less good. A poor match may result in a negative review for that reason alone, an effect identified in Zegners (2016a and2016b). Interesting, two new developments in the brick-and-mortar end of retailing may suggest that solving the search problem only through on-line platforms may be difficult.…”