Ratings design and barriers to entry

Nikhil Vellodi ()
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Nikhil Vellodi: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris

PSE-Ecole d'économie de Paris (Postprint) from HAL

Abstract: I study the impact of consumer reviews on the incentives for firms to participate in the market. I develop a model of endogenous entry in which firms produce goods of heterogeneous, unknown quality. Consumers engage in directed search, and prices are exogenously fixed. A rater uses consumer reviews to construct firm‐specific ratings that are informative of quality and help consumers direct their search. The main insight of the paper is that suppressing the reviews of highly‐rated firms strengthens entry incentives and improves consumer welfare.

Date: 2026-07
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Published in Theoretical Economics, 2026, 21 (3), pp.775-809. ⟨10.3982/TE6338⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:halshs-05845667

DOI: 10.3982/TE6338

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