Negative price premium effect in online market—The impact of competition and buyer informativeness on the pricing strategies of sellers with different reputation levels

Motivated by the contradictory findings in literature regarding whether high-reputation sellers enjoy a price premium over low-reputation sellers, this paper examines the pricing strategies of sellers with different reputation levels. We find that a negative price premium effect (i.e., a high-reputation seller charges a lower price than a low-reputation seller) exists due to: (1) the presence of both informed and uninformed buyers, which makes sellers follow mixed pricing strategies. It is then possible for a high-reputation seller setting a lower price than a low-reputation seller. Moreover, when the proportion of informed buyers exceeds a certain threshold, the expected price of a high-reputation seller is even lower than that of a low-reputation seller; (2) the competition among the sellers, which reduces the high-reputation sellers' prices but increases the low-reputation sellers' prices. Consequently, a high-reputation seller is more likely to charge a lower price than a low-reputation seller when the competition intensifies. Our empirical findings also support our theoretical results on the negative price premium effect.

► Buyer informativeness makes seller pricing follows a mixed strategy.
► A high-reputation seller’s average price may be lower than a low-reputation seller’s.
► The competition among the sellers may increase the low-reputation sellers’ prices.
► The negative price premium is more likely to happen when competition intensifies.