Social Learning and Strategic Pricing with Rating Systems

Chen, Chia-Hui; Chen, Kong-Pin; Ishida, Junichiro

doi:10.1257/mic.20230326

Abstract

Rating systems, widely used in online transactions, often reduce buyers' diverse opinions to summary statistics. To explore the consequences of this coarse aggregation, we analyze a dynamic adverse selection model where buyers share anonymous evaluations via a rating system. With heterogeneous buyers, the seller is tempted to secretly lower prices to attract favorable ratings from price-sensitive buyers. That leads to sporadic flash sales. The seller's incentive to manipulate ratings is, however, self-defeating. Our analysis illustrates how the rating system shapes the allocation of surplus and offers insights for platform and product design.

蝌蚪网

蝌蚪网 Journal:
Microeconomics