Online Booking and Information: Competition and Welfare Consequences of Review Aggregators

IEB Working Paper N. 2015/11

35 Pages Posted: 20 Mar 2015

See all articles by Amedeo Piolatto

Amedeo Piolatto

Autonomous University of Barcelona; Barcelona Economics Institute (IEB); Barcelona Graduate School of Economics (Barcelona GSE)

Date Written: March 17, 2015

Abstract

Online review aggregators (e.g., booking dot com or ClubKviar) provide detailed information about experience goods, such as restaurants and hotels. This study fosters the understanding of how such aggregators modify competition, profits and welfare. Using a spokes model of horizontal competition, I show that review aggregators enhance total welfare mainly by making valuable information available to consumers. The effect on welfare goes through different channels: 1) realised transactions are more valuable for the match between producers and consumers is more accurate; 2) the costumer base enlarges, for more agents find a suitable product; 3) the equilibrium price weakly decreases for competition amongst firms is more intense. However, firms face a prisoner dilemma: firms best response to the status quo is to appear on the aggregator's web so as to enlarge their market share, however, this leads to lower profits than if they all agreed not to use the aggregator.

Keywords: Horizontal competition, spokes model, welfare, review aggregators, online booking, ClubKviar, experience goods, mismatch costs

JEL Classification: D43, D61, D83, L11, L13, L15

Suggested Citation

Piolatto, Amedeo, Online Booking and Information: Competition and Welfare Consequences of Review Aggregators (March 17, 2015). IEB Working Paper N. 2015/11, Available at SSRN: https://ssrn.com/abstract=2580364 or http://dx.doi.org/10.2139/ssrn.2580364

Amedeo Piolatto (Contact Author)

Autonomous University of Barcelona ( email )

Department of Economics and Economic History
Edifici B - Campus Bellaterra
Barcelona, 08193
Spain

HOME PAGE: http://https://sites.google.com/site/piolatto/

Barcelona Economics Institute (IEB) ( email )

c/ John M. Keynes, 1-11
Barcelona, 08034
Spain

HOME PAGE: http://https://sites.google.com/site/piolatto/

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

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