Peer-to-Peer Markets with Bilateral Ratings

T. Tony Ke (), Baojun Jiang () and Monic Sun ()
Additional contact information
T. Tony Ke: MIT Sloan School of Management
Baojun Jiang: Washington University in St. Louis
Monic Sun: Boston University

No 17-01, Working Papers from NET Institute

Abstract: We consider a platform that matches service providers with potential customers. Ratings of a service provider reveal the quality of his service while ratings of a consumer reveal the cost to serve her. Under a competitive search framework, we study how bilateral ratings influence market competition and segmentation. Two types of equilibria exist under bilateral ratings. In the first type, low-cost consumers only apply to high-quality service providers, who post a higher price, have longer queues and are less likely to accept an application than low-quality providers. High-cost consumers apply to all service providers and have a lower acceptance rate. In the second type of equilibria, both high- and low-quality service providers serve all consumers. Across all equilibria, equilibrium prices may decrease as the fraction of high-quality providers increases, as consumers become more costly to serve, and as the platform's commission rate increases. Compared with a platform with unilateral ratings where only service providers are rated, a platform with bilateral ratings may soften service providers' competition, leading to higher equilibrium prices. Lastly, we find that in the case of incomplete market coverage, high-quality service providers may charge lower prices than low-quality providers in equilibrium, because by charging a lower price, a high-quality service provider attracts more consumer applications, which enables him to cherrypick a low-cost consumer, while a low-quality service provider faces with consumers with higher serving costs and thus charge a higher price to make up the serving cost.

Keywords: Platform; Peer-to-Peer; Competitive Search; Matching; Reviews; Information Disclosure; Segmentation (search for similar items in EconPapers)
JEL-codes: D82 D83 M31 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2017-09
New Economics Papers: this item is included in nep-com, nep-cta, nep-des, nep-mic, nep-mkt, nep-pay and nep-reg
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Citations: View citations in EconPapers (2)

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