When Biased Ratings Benefit the Consumer - An Economic Analysis of Online Ratings in Markets with Variety-Seeking Consumers

For the sake of variety, consumers in many markets often choose to consume an unknown, potentially low-quality good over a known, high-quality one. Online ratings, despite their widely recognized importance for assessing the quality of unknown goods, have not yet been studied in the light of such variety-seeking behavior. In particular, it remains unclear how online ratings interact with variety-seeking in terms of market outcomes. This study proposes an analytical model to analyze this interaction, including pricing, profits, and consumer surplus. The main results of the model analysis suggest that for markets where consumers' tendency for variety-seeking is sufficiently strong, the following holds: (1) An increase in online ratings is more profitable for low-quality than for high-quality sellers, and (2) an increase in online ratings leads to an increase in consumer surplus even if ratings overestimate actual quality (i.e., are positively biased). These insights can help not only businesses operating in these markets with managing their online reputation and setting their prices, but also review system designers with de-biasing the ratings published on their system.