DP8702 Good rankings are bad - Why reliable rankings can hurt consumers

Author(s): Laurent Bouton, Georg Kirchsteiger
Publication Date: December 2011
Keyword(s): Consumer Welfare, Externalities, Market Power, Rankings, Rationing
JEL(s): D1, D4, D6, D8, L1
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8702

Ranking have become increasingly popular on markets for study programs, restaurants, wines, cars, etc. This paper analyses the welfare implication of such rankings. Consumers have to make a choice between two goods of unknown quality with exogenous presence or absence of an informative ranking. We show that existence of the ranking might make all consumers worse off. The existence of a ranking changes the demand structure of consumers. With rigid prices and rationing, the change can be detrimental to consumers due to its effect on rationing. Furthermore, this change in demand can also be detrimental due to consumption externalities. Finally, with perfectly flexible prices the ranking might increase the market power of firms and hence lead to losses for all consumers.