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Discussion Paper Details

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Title: Good rankings are bad - Why reliable rankings can hurt consumers

Author(s): Laurent Bouton and Georg Kirchsteiger

Publication Date: December 2011

Keyword(s): Consumer Welfare, Externalities, Market Power, Rankings and Rationing

Programme Area(s): Industrial Organization

Abstract: 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.

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Bibliographic Reference

Bouton, L and Kirchsteiger, G. 2011. 'Good rankings are bad - Why reliable rankings can hurt consumers'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8702