American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Social Learning and Strategic Pricing with Rating Systems
American Economic Journal: Microeconomics
(pp. 147–80)
Abstract
Rating systems, widely used in online transactions, often reduce buyers' diverse opinions to summary statistics. To explore the consequences of this coarse aggregation, we analyze a dynamic adverse selection model where buyers share anonymous evaluations via a rating system. With heterogeneous buyers, the seller is tempted to secretly lower prices to attract favorable ratings from price-sensitive buyers. That leads to sporadic flash sales. The seller's incentive to manipulate ratings is, however, self-defeating. Our analysis illustrates how the rating system shapes the allocation of surplus and offers insights for platform and product design.Citation
Chen, Chia-Hui, Kong-Pin Chen, and Junichiro Ishida. 2025. "Social Learning and Strategic Pricing with Rating Systems." American Economic Journal: Microeconomics 17 (4): 147–80. DOI: 10.1257/mic.20230326Additional Materials
JEL Classification
- D11 Consumer Economics: Theory
- D82 Asymmetric and Private Information; Mechanism Design
- L11 Production, Pricing, and Market Structure; Size Distribution of Firms
- L81 Retail and Wholesale Trade; e-Commerce