November 04, 2022
14:30
ZOOM
Christoph Carnehl (Bocconi University)
Pricing for the Stars
Dynamic Pricing in the Presence of Rating Systems
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. Our model flexibly parametrizes the two effects. This parametrization can rationalize the observed heterogeneity in the relationship between reviews and prices and highlights the dependence of outcomes on the dominant effect. We analytically characterize a seller’s optimal dynamic pricing strategy, long-run profits and consumer surplus, as well as consumers’ speed of learning. Knowledge of the relative strength of price and selection effect is essential for managing ratings with prices. Our results have important implications for the design of rating systems.