Do Firms Prefer Likers or Doubters?

The social media has emerged as an appealing new channel for firms to promote products/services. A fundamental but largely unanswered question is how would the firm use social media to promote products. We address the question by focusing on the movie industry and developing a dynamic game-theoretic model. We assume that: 1) firm intends to build its market reputation; 2) consumers always prefer to watch a high-quality movie. Our model suggests that, it can be optimal for a rational firm to underrate the movie. More specifically, we find that the movie distribution firm would have incentives to overrate the movie even if they observe that the movie quality is low. Furthermore, we show that as long as there is a properly designed uncertainty resolution mechanism, the adoption of social media could alleviate the “Lemon” problem in the movie market, which in turn, improves market efficiency.