Pricing for the Stars

39 Pages Posted: 6 Jan 2019 Last revised: 13 Jul 2020

See all articles by André Stenzel

André Stenzel

University of Mannheim and MaCCI

Christoph Wolf

Bocconi University

Peter Schmidt

Bocconi University - Department of Economics

Date Written: July 10, 2020

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,
higher prices also induce only those 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 an 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.

Keywords: Rating Systems, Dynamic Pricing, Asymmetric Information

JEL Classification: D21, D82, L15

Suggested Citation

Stenzel, André and Wolf, Christoph and Schmidt, Peter, Pricing for the Stars (July 10, 2020). Available at SSRN: https://ssrn.com/abstract=3305217 or http://dx.doi.org/10.2139/ssrn.3305217

André Stenzel (Contact Author)

University of Mannheim and MaCCI ( email )

Department of Economics, University of Mannheim
L7, 3-5
Mannheim, 68131
Germany

Christoph Wolf

Bocconi University

Milan, MI 20136
Italy

Peter Schmidt

Bocconi University - Department of Economics ( email )

Via Röntgen 1
Milan, 20136
Italy

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