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

An important strategy for sellers to build an online reputation is to practice introductory pricing. By selling at a lower introductory price, sellers can increase demand, induce more buyers to provide online reviews and ratings, and thus build a reputation more quickly. I examine a form of introductory pricing that is particularly popular on digital platforms: offering digital content for free. I show that offering free content to build a reputation can be a double-edged strategy. It does not only attract buyers with a high preference for a product but also buyers with a low preference. Low-preference buyers give worse feedback than high-preference buyers, inducing a negative selection effect on a seller's reputation. The implication is that although traditional entry barriers such as distribution costs are significantly lower in digital markets, there is an additional reputational entry barrier for sellers into digital markets.