Should a Sharing Platform Adopt the Bilateral Review System?
33 Pages Posted: 7 Dec 2020 Last revised: 8 Jun 2021
Date Written: November 2, 2020
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
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