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  3. American Economic Journal: Microeconomics
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  5. Social Learning and Strategic Pricing with Rating Systems

American Economic Journal:
Microeconomics

ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)

Social Learning and Strategic Pricing with Rating Systems

  • Chia-Hui Chen
  • Kong-Pin Chen
  • Junichiro Ishida
American Economic Journal: Microeconomics (Forthcoming)

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.

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