Social Learning and Strategic Pricing with Rating Systems

Chia-Hui Chen, Kong-Pin Chen and Junichiro Ishida

American Economic Journal: Microeconomics, 2025, vol. 17, issue 4, 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.

JEL-codes: D11 D82 L11 L81 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Social Learning and Strategic Pricing with Rating Systems (2023)
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DOI: 10.1257/mic.20230326

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