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Ratings Design and Barriers to Entry

Author

Listed:
  • Nikhil Vellodi

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

I study the impact of consumer reviews on the incentives for firms to participate in the market through the lens of ratings design. Firms produce goods of heterogeneous, unknown quality that is gradually revealed via consumer reviews, and face both entry and exit decisions. A platform combines past reviews to construct firm-specific ratings that help guide consumer search. When the platform integrates all reviews into ratings, consumers form queues at the highest-rated firms. This demand profile induces a convex-concave continuation value for firms as a function of ratings. While firms thus prefer more feedback when struggling and less feedback when established, equilibrium induces the reverse allocation. The main insight of the paper is that suppressing the reviews of highly-rated firms stimulates entry and improves consumer welfare.

Suggested Citation

  • Nikhil Vellodi, 2022. "Ratings Design and Barriers to Entry," Working Papers hal-04465801, HAL.
    • Handle: RePEc:hal:wpaper:hal-04465801
    as

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