Design of Platform Reputation Systems: Optimal Information Disclosure

56 Pages Posted: 9 Apr 2020 Last revised: 29 Jun 2022

See all articles by Zijun (June) Shi

Zijun (June) Shi

Hong Kong University of Science & Technology (HKUST)

Kannan Srinivasan

Carnegie Mellon University

Kaifu Zhang

Alibaba Group

Date Written: March 14, 2020

Abstract

Reputation systems play a central role in a variety of marketplaces to eliminate information asymmetry between sellers and buyers. Despite their crucial role, the design of reputation systems remains a complicated issue. Some platforms try to disclose as much product information as possible through their reputation systems, by encouraging consumers to leave reviews or ratings. In contrast, some platforms disclose only partial product information to the public. Platforms, as the designers of such reputation systems, are thus an additional player added to conventional seller-buyer games. This paper studies the optimal information disclosure in a reputation system from the platform's profit standpoint. In a three-player game, sellers with different base quality decide investment in quality, the platform decides the amount of information about the product quality (i.e., ratings) to disclose through its reputation system, and the future consumer as the receiver makes the purchase decision after observing the information about the product quality. By modeling consumers as Bayesian learners, we specify conditions under which withholding some private information of the sellers can serve the platform's goal of maximizing profits by incentivizing seller investment in quality. We find that, although fully disclosing information can eliminate information asymmetry, it may hinder the sellers' incentive to invest in quality, which hurts the platform's profits. Two main effects are in favor of withholding private information: the quality improving effect, which makes sellers more willing to invest in quality, and the sales increasing effect, which leads to more transactions on the platform.

Keywords: reputation system, information disclosure, platform, e-commerce

Suggested Citation

Shi, Zijun (June) and Srinivasan, Kannan and Zhang, Kaifu, Design of Platform Reputation Systems: Optimal Information Disclosure (March 14, 2020). Available at SSRN: https://ssrn.com/abstract=3557086 or http://dx.doi.org/10.2139/ssrn.3557086

Zijun (June) Shi (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Kannan Srinivasan

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

Kaifu Zhang

Alibaba Group

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