Peer-to-Peer Markets with Bilateral Ratings

Abstract

Peer-to-peer (P2P) markets have become a critical aspect of the modern economy. We consider a P2P market where a time-sensitive service is provided through a platform that matches providers of varying qualities to customers of varying costs. The P2P platform features bilateral ratings, which distinguishes itself from a traditional market: ratings of a provider reveal his service quality and ratings of a customer reveal her service cost. The existence of a cost measure in the P2P market leads to novel pricing considerations: a provider can attract low-cost customers by charging a low price, leading to an “endogenous composition effect”. As a result, equilibrium prices may decrease as customers become more costly to serve or as the platform's commission rate gets higher. Under certain conditions, high-quality providers may even charge a lower equilibrium price than low-quality providers in order to cherrypick low-cost customers. Exploratory analysis reveals that compared with unilateral ratings, bilateral ratings may soften provider competition and raise equilibrium prices as the providers target customers in different cost segments.

Keywords: platform design, information disclosure, customer reviews, decentralized matching, price competition