IDEAS home Printed from https://ideas.repec.org/p/pdn/dispap/43.html
   My bibliography  Save this paper

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

    Download full text from publisher

    File URL: http://groups.uni-paderborn.de/wp-wiwi/RePEc/pdf/dispap/DP43.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Daniel W. Elfenbein & Raymond Fisman & Brian McManus, 2015. "Market Structure, Reputation, and the Value of Quality Certification," American Economic Journal: Microeconomics, American Economic Association, vol. 7(4), pages 83-108, November.
    2. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    3. David H. Autor, 2003. "Outsourcing at Will: The Contribution of Unjust Dismissal Doctrine to the Growth of Employment Outsourcing," Journal of Labor Economics, University of Chicago Press, vol. 21(1), pages 1-42, January.
    4. Ashenfelter, Orley & Card, David, 1985. "Using the Longitudinal Structure of Earnings to Estimate the Effect of Training Programs," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 648-660, November.
    5. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 249-275.
    6. Luís Cabral & Ali Hortaçsu, 2010. "The Dynamics Of Seller Reputation: Evidence From Ebay," Journal of Industrial Economics, Wiley Blackwell, vol. 58(1), pages 54-78, March.
    7. Chrysanthos Dellarocas & Charles A. Wood, 2008. "The Sound of Silence in Online Feedback: Estimating Trading Risks in the Presence of Reporting Bias," Management Science, INFORMS, vol. 54(3), pages 460-476, March.
    8. Monic Sun, 2012. "How Does the Variance of Product Ratings Matter?," Management Science, INFORMS, vol. 58(4), pages 696-707, April.
    9. Xiang Hui & Maryam Saeedi & Zeqian Shen & Neel Sundaresan, 2016. "Reputation and Regulations: Evidence from eBay," Management Science, INFORMS, vol. 62(12), pages 3604-3616, December.
    10. Nagle, Thomas, 1984. "Economic Foundations for Pricing," The Journal of Business, University of Chicago Press, vol. 57(1), pages 3-26, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Joost Rietveld & Robert Seamans & Katia Meggiorin, 2021. "Market Orchestrators: The Effects of Certification on Platforms and Their Complementors," Strategy Science, INFORMS, vol. 6(3), pages 244-264, September.
    2. Davide Proserpio & Georgios Zervas, 2017. "Online Reputation Management: Estimating the Impact of Management Responses on Consumer Reviews," Marketing Science, INFORMS, vol. 36(5), pages 645-665, September.
    3. Arslan Aziz & Hui Li & Rahul Telang, 2023. "The Consequences of Rating Inflation on Platforms: Evidence from a Quasi-Experiment," Information Systems Research, INFORMS, vol. 34(2), pages 590-608, June.
    4. Dominik Gutt & Jürgen Neumann & Steffen Zimmermann & Dennis Kundisch & Jianqing Chen, 2018. "Design of Review Systems - A Strategic Instrument to shape Online Review Behavior and Economic Outcomes," Working Papers Dissertations 42, Paderborn University, Faculty of Business Administration and Economics.
    5. Beestermöller, Matthias, 2017. "Striking Evidence? Demand Persistence for Inter-City Buses from German Railway Strikes," Discussion Papers in Economics 31768, University of Munich, Department of Economics.
    6. aus dem Moore, Jan Peter & Spitz-Oener, Alexandra, 2012. "Bye bye, GI: The impact of the US military drawdown on local German labor markets," SFB 649 Discussion Papers 2012-024, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    7. Ahlfeldt, Gabriel M. & Nitsch, Volker & Wendland, Nicolai, 2019. "Ease vs. noise: Long-run changes in the value of transport (dis)amenities," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    8. Xiang Hui & Meng Liu, 2022. "Quality Certificates Alleviate Consumer Aversion to Sponsored Search Advertising," CESifo Working Paper Series 9886, CESifo.
    9. Dang, Viet A. & De Cesari, Amedeo & Phan, Hieu V., 2021. "Employment protection and share repurchases: Evidence from wrongful discharge laws," Journal of Corporate Finance, Elsevier, vol. 69(C).
    10. Alan Benson & Aaron Sojourner & Akhmed Umyarov, 2020. "Can Reputation Discipline the Gig Economy? Experimental Evidence from an Online Labor Market," Management Science, INFORMS, vol. 66(5), pages 1802-1825, May.
    11. Johanna Catherine Maclean & Michael F. Pesko & Steven C. Hill, 2017. "The Effect of Insurance Expansions on Smoking Cessation Medication Prescriptions: Evidence from ACA Medicaid Expansions," NBER Working Papers 23450, National Bureau of Economic Research, Inc.
    12. Michelangelo Rossi, 2019. "How Does Competition Affect Reputation Concerns? Theory and Evidence from Airbnb," CESifo Working Paper Series 7972, CESifo.
    13. Christofzik, Désirée I. & Schneider, Benny, 2019. "Fiscal policy adjustments to budget shocks: Evidence from German municipalities," Working Papers 10/2019, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    14. Gabriel Ahlfeldt & Volker Nitsch & Nicolai Wendland, 2016. "Ease vs. Noise: On the Conflicting Effects of Transportation Infrastructure," CESifo Working Paper Series 6058, CESifo.
    15. Wei Chen & Zaiyan Wei & Karen Xie, 2022. "The Battle for Homes: How Does Home Sharing Disrupt Local Residential Markets?," Management Science, INFORMS, vol. 68(12), pages 8589-8612, December.
    16. Xiang Hui, 2020. "Facilitating Inclusive Global Trade: Evidence from a Field Experiment," Management Science, INFORMS, vol. 66(4), pages 1737-1755, April.
    17. Johanna Catherine Maclean & Benjamin L. Cook & Nicholas Carson & Michael F. Pesko, 2017. "Public Insurance and Psychotropic Prescription Medications for Mental Illness," NBER Working Papers 23760, National Bureau of Economic Research, Inc.
    18. Daniel W. Elfenbein & Raymond Fisman & Brian McManus, 2023. "The Impact of Socioeconomic and Cultural Differences on Online Trade," Management Science, INFORMS, vol. 69(10), pages 6181-6201, October.
    19. Holm-Hadulla, Fédéric, 2020. "Fiscal equalization and the tax structure," Regional Science and Urban Economics, Elsevier, vol. 81(C).
    20. Sergio Destefanis & Matteo Fragetta & Emanuel Gasteiger, 2024. "Does one size fit all in the Euro Area? Some counterfactual evidence," Empirical Economics, Springer, vol. 67(4), pages 1615-1647, October.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pdn:dispap:43. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: WP-WiWi-Info (email available below). General contact details of provider: https://edirc.repec.org/data/fwpadde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.