Working Paper: NBER ID: w21083
Authors: Laurent Bouton; Georg Kirchsteiger
Abstract: Rankings have become increasingly popular on various markets, e.g. the market for study programs. We analyze their welfare implications. Consumers have to choose between two goods of unknown quality with exogenous presence or absence of an unbiased informative ranking. The existence of the ranking might affect the welfare of all consumers negatively. With rigid prices, the ranking induced change in demand can be detrimental to all consumers in markets featuring rationing or consumption externalities. With perfectly flexible prices, the ranking might increase firms' market power, and hence lead to losses for all consumers even in the absence of rationing and consumption externalities.
Keywords: Rankings; Consumer Welfare; Market Power; Consumption Externalities; Capacity Constraints
JEL Codes: D8; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rankings (A14) | consumer welfare (D69) |
| absence of consumption externalities and capacity constraints (D62) | rankings (A14) |
| consumption externalities or capacity constraints (D62) | rankings (A14) |
| rankings (A14) | market power for firms (L11) |
| market power for firms (L11) | consumer welfare (D69) |
| rationing scheme less discriminatory (D45) | detrimental effects of rankings (A14) |
| consumption externalities more pronounced (D62) | detrimental effects of rankings (A14) |
| quality differences between goods substantial (L15) | detrimental effects of rankings (A14) |