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Optimal Simple Ratings

Author

Listed:
  • Hugo Hopenhayn
  • Maryam Saeedi

Abstract

We study optimal simple rating systems that partition sellers into a finite number of tiers. We show that optimal ratings must be threshold partitions, and that for linear supply and Cournot competition with constant marginal cost, optimal thresholds solve a k-means clustering problem requiring only the quality distribution. For convex (concave) supply functions, optimal thresholds are higher (lower) than the k-means solution. For log-concave distributions, two-tier certification captures at least 50 percent of maximum welfare gains from full disclosure, with five tiers typically achieving over 90 percent. Applications to eBay and Medicare Advantage data illustrate our method.

Suggested Citation

  • Hugo Hopenhayn & Maryam Saeedi, 2026. "Optimal Simple Ratings," NBER Working Papers 34889, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34889
    Note: IO TWP
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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