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Does Platform Competition Drive Ratings Inflation? The Impact of Vertical Spillover Effects

Common 5-star ratings system is a key source of information for consumers trying to decide where to eat, what products to buy, or which doctor to visit. Therefore, it is not surprising that platform vendors often want to inflate their ratings to boost sales, but it is less clear why some platform owners let them do so. Biased ratings diminish the capacity of the platform to match supply and demand effectively and, hence, a platform owner should act against such ratings inflation. To explain this important dilemma, we study a market in which both vendors and consumers multihome on several platforms and, consequently, the consumers may see different average ratings for the same vendors across the platforms. Using incentive aligned experiments and experiments based on stated preferences method in an online food ordering context, we show that consumers are more likely to buy from a platform where the chosen vendor is rated higher due to a vertical spillover effect. Our results suggest that platform owners need to take a threat from hosting lower average ratings seriously and, at minimum, keep on an eye how competitors govern ratings on their platforms—a platform that naively invests in countering ratings manipulation risks hurting itself if competitors let their ratings become inflated. Adopting a common third-party ratings provider across competing platforms or using alternative ratings systems could work against ratings inflation and make it easier for new platforms to enter the market. The results contribute to academic literature on spillover effects, platform competition and online ratings.