Good rankings are bad - Why reliable rankings can hurt consumers
AbstractRanking have become increasingly popular on markets for study programs, restaurants, wines, cars, etc. This paper analyses the welfare implication of such rankings. Consumers have to make a choice between two goods of unknown quality with exogenous presence or absence of an informative ranking. We show that existence of the ranking might make all consumers worse off. The existence of a ranking changes the demand structure of consumers. With rigid prices and rationing, the change can be detrimental to consumers due to its effect on rationing. Furthermore, this change in demand can also be detrimental due to consumption externalities. Finally, with perfectly flexible prices the ranking might increase the market power of firms and hence lead to losses for all consumers.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8702.
Date of creation: Dec 2011
Date of revision:
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Other versions of this item:
- Laurent Bouton, 2011. "Good rankings are bad - Why reliable rankings can hurt consumers," Boston University - Department of Economics - Working Papers Series WP2011-002, Boston University - Department of Economics.
- D1 - Microeconomics - - Household Behavior
- D4 - Microeconomics - - Market Structure and Pricing
- D6 - Microeconomics - - Welfare Economics
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-19 (All new papers)
- NEP-MIC-2011-12-19 (Microeconomics)
- NEP-MKT-2011-12-19 (Marketing)
- NEP-TUR-2011-12-19 (Tourism Economics)
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