Ratings Design and Barriers to Entry
summary
Model with firms of binary hidden quality that learn through noisy consumer reviews and endogenous sales; consumers see posterior ratings and randomly ration when capacity binds, producing a steady-state ratings distribution. Full transparency concentrates feedback on incumbents, raising the consumer threshold P and deterring entry. Optimal design therefore suppresses incumbent reviews (a kind of certification), speeding profitable learning for entrants and raising welfare measured by the consumer welfare threshold*. Predicts a fat right tail in ratings; Yelp restaurant evidence reported.
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