The value of ratings inflation

Does ratings inflation help or hurt consumers? Managers? To answer these questions, we build a dynamic pricing model, wherein consumers’ utility depends on product features including the consumer rating that evolves over time. Applying control theory, we compare the pricing strategies with and without ratings inflation. In addition, we empirically validate the model using market data on 10,263 Airbnb properties over four years from Austin, Texas. We find a counterintuitive result that ratings inflation helps both managers and consumers. Under the dynamic pricing context, ratings inflation helps managers because they earn a higher long-term profit although consumer surplus decreases. However, the ratio of consumer surplus in dynamic pricing relative to that from static pricing increases as ratings increase. Furthermore, the price premium over the static pricing decreases as ratings increase. Consequently, consumers are least worse off when the rating approaches its ceiling value. Hence, ratings inflation helps consumers as well.