Ratings Design and Barriers to Entry

Nikhil Vellodi (Princeton University and Paris School of Economics)

September 8, 2020, 14:00–15:00

Zoom meeting

Economics of Platforms Seminar


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 – full transparency – consumers form queues at the highest-rated firms. This demand profile induces an S-shaped continuation value for firms as a function of ratings. Whereas firms thus prefer more feedback when struggling and less feedback when established, equilibrium induces precisely the reverse allocation. The main insight of the paper is that suppressing the reviews of highly-rated firms makes the task of climbing the ratings ladder less arduous, thus stimulating participation and consumer welfare. This insight is robust to extensions that allow for price setting, costly effort and heterogeneous consumer preferences.