Pricing for the Stars

32 Pages Posted: 6 Jan 2019 Last revised: 17 Aug 2019

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: August 17, 2019

Abstract

We consider dynamic price-setting in the presence of rating systems and asymmetric information about product quality. A long-lived monopolist sells a product of privately known and fixed quality to a sequence of short-lived consumers. In each period, the price charged determines the taste characteristics of purchasing consumers who leave reviews after purchase. Individual reviews are aggregated into ratings observable to future consumers. The price has two effects on future ratings: (i) a direct price effect on reviews, and (ii) an indirect selection effect by determining the tastes of reviewing consumers. Inference is conducted by looking for the inferred quality and cutoff taste such that purchase decisions are individually rational and the current aggregate rating is matched. We show that rating systems are effective as consumers correctly infer the quality of the product in the long run. However, the design of the rating system affects long-run prices, profits and consumer surplus. If the direct price effect dominates the selection effect, consumers benefit from a rating system which is more sensitive to newly arriving reviews. In contrast, they prefer a more persistent system if the selection effect dominates. Firms are unambiguously better off the more sensitive the rating system.

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 (August 17, 2019). 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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