Fall 2022

Data-Driven Decision Processes Seminar

Tuesday, Sep. 27, 2022 1:00 pm2:00 pm PDT

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Nikhil Vellodi (Paris School of Economics)


Room 116

Title: "Ratings Design and Barriers to Entry"

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 -- full transparency -- 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 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 entry and ultimately consumer welfare.