A Homeowner’s Guide to Airbnb: Theory and Empirical Evidence for Optimal Pricing Conditional on Online Ratings

Jürgen Neumann, Dominik Gutt () and Dennis Kundisch ()
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Jürgen Neumann: Paderborn University
Dominik Gutt: Paderborn University
Dennis Kundisch: Paderborn University

No 43, Working Papers Dissertations from Paderborn University, Faculty of Business Administration and Economics

Abstract: Optimal price setting in peer-to-peer markets featuring online ratings requires incorporating interactions between prices and ratings. Additionally, recent literature reports that online ratings in peer-to-peer markets tend to be inflated overall, undermining the reliability of online ratings as a quality signal. This study proposes a two-period model for optimal price setting that takes (potentially inflated) ratings into account. Our theoretical findings suggest that sellers in the medium-quality segment have an incentive to lower first-period prices to monetize on increased second-period ratings. The possibility of monetizing on second-period ratings depends on the buyers’ assessment of the rating system’s reliability. Additionally, we find that total profits and prices increase with online ratings and additional quality signals. Empirically, conducting Difference-in-Difference regressions on a comprehensive panel data set from Airbnb, we can validate that price increases are associated with lower ratings, and we find empirical support for the prediction that additional quality signals increase prices. Our work comes with substantial implications for sellers in peer-to-peer markets looking for an optimal price setting strategy.

Keywords: Sharing Economy; Online Ratings; Optimal Price Setting; DiD-Regression. (search for similar items in EconPapers)
JEL-codes: D12 M15 M31 O32 (search for similar items in EconPapers)
Pages: 22
Date: 2018-12
New Economics Papers: this item is included in nep-pay and nep-ure
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