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Digitization and Pre-purchase Information: The Causal and Welfare Impacts of Reviews and Crowd Ratings

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  • Imke Reimers
  • Joel Waldfogel

Abstract

Digitization has led to many new creative products, straining the capacity of professional critics and consumers. Yet, the digitization of retailing has also delivered new crowd-based sources of pre-purchase information. We compare the relative impacts of professional critics and crowd-based Amazon star ratings on consumer welfare in book publishing. Using various fixed effects and discontinuity-based empirical strategies, we estimate their causal impacts on sales. We use these causal estimates to calibrate a structural demand model. The aggregate effect of star ratings on consumer surplus is, in our baseline estimates, more than ten times the effect of traditional review outlets.

Suggested Citation

  • Imke Reimers & Joel Waldfogel, 2021. "Digitization and Pre-purchase Information: The Causal and Welfare Impacts of Reviews and Crowd Ratings," American Economic Review, American Economic Association, vol. 111(6), pages 1944-1971, June.
    • Handle: RePEc:aea:aecrev:v:111:y:2021:i:6:p:1944-71
    DOI: 10.1257/aer.20200153
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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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