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A Homeowner’s Guide to Airbnb: Theory and Empirical Evidence for Optimal Pricing Conditional on Online Ratings

Author

Listed:
  • Jürgen Neumann

    (Paderborn University)

  • Dominik Gutt

    (Paderborn University)

  • Dennis Kundisch

    (Paderborn University)

Abstract

Optimal price setting in peer-to-peer markets featuring online ratings requires incorporating interactions between prices and ratings. Additionally, recent literature reports that online ratings in peer-to-peer markets tend to be inflated overall, undermining the reliability of online ratings as a quality signal. This study proposes a two-period model for optimal price setting that takes (potentially inflated) ratings into account. Our theoretical findings suggest that sellers in the medium-quality segment have an incentive to lower first-period prices to monetize on increased second-period ratings. The possibility of monetizing on second-period ratings depends on the buyers’ assessment of the rating system’s reliability. Additionally, we find that total profits and prices increase with online ratings and additional quality signals. Empirically, conducting Difference-in-Difference regressions on a comprehensive panel data set from Airbnb, we can validate that price increases are associated with lower ratings, and we find empirical support for the prediction that additional quality signals increase prices. Our work comes with substantial implications for sellers in peer-to-peer markets looking for an optimal price setting strategy.

Suggested Citation

  • Jürgen Neumann & Dominik Gutt & Dennis Kundisch, 2018. "A Homeowner’s Guide to Airbnb: Theory and Empirical Evidence for Optimal Pricing Conditional on Online Ratings," Working Papers Dissertations 43, Paderborn University, Faculty of Business Administration and Economics.
    • Handle: RePEc:pdn:dispap:43
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Sharing Economy; Online Ratings; Optimal Price Setting; DiD-Regression.;
    All these keywords.

    JEL classification:

    • M15 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - IT Management
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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