Should a Sharing Platform Adopt the Bilateral Review System?

33 Pages Posted: 7 Dec 2020 Last revised: 8 Jun 2021

See all articles by Xuanqi Chen

Xuanqi Chen

Xi'an Jiaotong University (XJTU) - School of Management

Gang Li

Xi'an Jiaotong University (XJTU) - School of Management

Shengli Li

Peking University

Quan Zheng

University of Science and Technology of China - School of Management

Date Written: November 2, 2020

Abstract

The sharing economy and platforms have gained popularity in recent years, raising concerns about demand-side information asymmetry: the cost to serve each buyer is typically unknown to sellers. To mitigate this concern, some platforms like Airbnb adopt the bilateral review system (BRS), where both buyers and sellers can rate each other, different from the traditional unilateral review system (URS). We examine the effect of different review systems on the operation of sharing platforms. We analyze a decentralized platform in which heterogeneous sellers with one-unit capacity set prices simultaneously and then get matched with buyers with different serving costs. We show that with URS, even when perfect seller information is provided, the high-quality sellers can still be driven out of the market, owing to buyer information asymmetry and the “co-production” nature of the serving cost, in contrast to adverse selection in the classic used-car market. Additionally, we identify the critical role of serving cost structure. Although BRS can alleviate the adverse selection problem with a convex cost function and benefits the platform, it is detrimental to the platform with a linear cost function. Interestingly, we find that providing buyer information could help buyers but hurt sellers. Moreover, BRS could lead to a win-win-win outcome for the platform, buyers, and sellers. Our results not only shed light on the review system design but also provide a plausible explanation for the business practice that BRS is widely used by sharing platforms like Airbnb and Fiverr.

Keywords: sharing economy, bilateral review system, platform, information asymmetry, adverse selection

Suggested Citation

Chen, Xuanqi and Li, Gang and Li, Shengli and Zheng, Quan, Should a Sharing Platform Adopt the Bilateral Review System? (November 2, 2020). Available at SSRN: https://ssrn.com/abstract=3724924

Xuanqi Chen

Xi'an Jiaotong University (XJTU) - School of Management ( email )

28,Xianning West Road
Xi'an, Shaanxi 710049
China

Gang Li

Xi'an Jiaotong University (XJTU) - School of Management ( email )

28,Xianning West Road
Xi'an, Shaanxi 710049
China

Shengli Li

Peking University ( email )

No. 5 Yiheyuan Road
Peking University
Beijing, Beijing 100871
China

Quan Zheng (Contact Author)

University of Science and Technology of China - School of Management ( email )

Hefei, Anhui
China

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