Good Rankings Are Bad: Why Reliable Rankings Can Hurt Consumers
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.
We are grateful to Elena Arias Ortiz, Micael Castanheira, Thomas Gall, Alessandro Gavazza, Victor Ginsburgh, Alessandro Lizzeri, and Andy Newman for insightful comments. We also benefitted from the comments of the audiences at BU, ECARES, Université de Lausanne, and at the conference on Gaming Incentive Systems in Bonn. All remaining errors are ours. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.