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Pricing for the Stars - Dynamic Pricing in the Presence of Rating Systems

Author

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  • André Stenzel
  • Christoph Wolf
  • Peter Schmidt

Abstract

Maintaining good ratings increases the profits of sellers on online platforms. We analyze the role of strategic pricing for ratings management in a setting where a monopolist sells a good of unknown quality. Higher prices reduce the value for money, which on average worsens reviews. However, they also induce only consumers with a strong taste for the product to purchase, which on average improves reviews. We provide conditions under which the latter effect dominates so that ratings management leads to upward pressure on prices. This upward pressure increases in the sensitivity of the aggregate rating to incoming reviews. As a consequence, recent changes to rating systems may have harmed consumers by increasing long-run price levels.

Suggested Citation

  • André Stenzel & Christoph Wolf & Peter Schmidt, 2020. "Pricing for the Stars - Dynamic Pricing in the Presence of Rating Systems," CRC TR 224 Discussion Paper Series crctr224_2020_143v2, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2020_143v2
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp143
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    Cited by:

    1. Martin, Simon & Shelegia, Sandro, 2021. "Underpromise and overdeliver? - Online product reviews and firm pricing," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    2. Dongwook Shin & Stefano Vaccari & Assaf Zeevi, 2023. "Dynamic Pricing with Online Reviews," Management Science, INFORMS, vol. 69(2), pages 824-845, February.

    More about this item

    Keywords

    Rating Systems; Dynamic Pricing; Asymmetric Information;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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