Two-Sided Adverse Selection and Bilateral Reviews in Sharing Economy

52 Pages Posted: 28 Dec 2019

See all articles by Murat M Tunc

Murat M Tunc

Tilburg University

Huseyin Cavusoglu

University of Texas at Dallas

Srinivasan Raghunathan

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: December 7, 2019

Abstract

We examine two-sided adverse selection in a sharing economy context where a platform matches service providers with consumers and both providers and consumers derive heterogeneous payoffs depending on whom they are matched with. Unlike the more prevalent unilateral review scheme in which only consumers rate providers, many sharing economy platforms use a bilateral review scheme in which both consumers and providers rate each other to reduce the information asymmetry on both sides of the market and to facilitate superior matches. However, we show that the bilateral review scheme does not necessarily lead to a higher social welfare than either the unilateral review scheme or the no review scheme. If the proportion of the low-cost consumers is less than a threshold, consumers are better off, the platform is worse off, and the providers are worse off under the bilateral review scheme than the unilateral review scheme. The key driver for these results is that the price competition between providers for the low-cost consumers can be fundamentally different under the different review schemes; the price competition affects the consumer preference for a provider and hence the match between consumers and providers, which ultimately determines the payoffs to participants and the social welfare. Our results highlight the importance of addressing the consumer-side adverse selection first to eliminate a market failure even in the sharing economy context. Our findings also contribute to the adverse selection literature by identifying the critical role played by demand and supply conditions on the impact of adverse selection.

Keywords: sharing economy, adverse selection, information asymmetry, competition, analytical modeling

JEL Classification: C7, D82, L15, M15

Suggested Citation

Tunc, Murat M and Cavusoglu, Huseyin and Raghunathan, Srinivasan, Two-Sided Adverse Selection and Bilateral Reviews in Sharing Economy (December 7, 2019). Available at SSRN: https://ssrn.com/abstract=3499979 or http://dx.doi.org/10.2139/ssrn.3499979

Murat M Tunc (Contact Author)

Tilburg University ( email )

Warandelaan 2
K 826
Tilburg, 5037 AB
Netherlands
+31 134 664 755 (Phone)

HOME PAGE: http://muratmtunc.github.io/

Huseyin Cavusoglu

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Srinivasan Raghunathan

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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