What Happens to Ratings When Both Sides Multihome? The Impact of Vertical Spillover Effect on Platform Competition and Ratings Inflation
Posted: 18 Feb 2021 Last revised: 5 Jun 2023
Date Written: December 17, 2020
The standard 5-star rating system is a key source of information for consumers trying to decide where to eat, what products to buy, or which doctor to visit. While it is not surprising that vendors try to inflate their average ratings to boost sales, it is less obvious why some retail platforms tolerate or may even subtly encourage such behavior. Biased ratings diminish the capacity of the platform to match supply and demand and, hence, platform owners should strive to combat ratings inflation. We study this dilemma in a setting in which vendors multihome on competing platforms, and consumers can easily switch among platforms. Consumers may thus learn about the same vendor across several platforms that may have different average ratings for it. If different average ratings across platforms could affect the choice of the platform, then the platform owner has the incentive to let the ratings become inflated. Using incentive-aligned experiments and experiments based on stated preferences in an online food ordering context, we show that consumers are more likely to purchase from a platform that shows a higher average rating. We explain this by a vertical spillover effect from average vendor ratings to platform choice. Our results suggest that platform owners must be careful to avoid showing lower average ratings and monitor how competitors govern ratings on their platforms–a platform that naively invests in countering ratings manipulation risks hurting itself if competitors turn a blind eye to inflated ratings. The results have implications for combating ratings inflation.
Keywords: online consumer reviews, online review platforms, platform competition, consumer choice
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