Impact of praise cashback strategy: Implications for consumers and e‐businesses

Abstract

This study focuses on a broadly adopted but largely underexplored cashback strategy, the praise cashback strategy (PCS), which aims to entice consumers to keep purchases and post positive online reviews. The literature acknowledges the impact of cashback strategies on consumers’ purchase and review behaviors; however, it does not focus on how they affect consumers’ return behaviors. Moreover, there are few studies on the effect of cashback strategies on consumer surplus and social welfare in the presence of strategic consumers, especially in relation to analyzing the proportion of fake reviews. By incorporating consumers’ review and return behaviors into a newsvendor model, we establish a sequential procedure for merchants to determine pricing, inventory, and PCS decisions, and then examine the conditions under which merchants prefer to adopt a PCS and its impact. Our results reveal that the adoption of a PCS is a typical prisoner's dilemma for merchants in markets where PCSs are prevalent. Only when the PCS phenomenon is pervasive in the market, will merchants adopt a PCS with a small cashback amount. A PCS market negatively impacts consumer surplus and social welfare; however, merchants and consumers may benefit from a small cashback amount. Contrary to the common belief that a PCS undermines the organic evolution of online reviews and reduces return rates, we show that a PCS only elicits a few fake reviews, while merchants may face higher return rates from adopting it. These results benefit future studies on cashback strategies and fake reviews and provide evidence that supports the scientific governance of PCSs.

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