Amedeo Piolatto (University of Barcelona)

“Online booking and information: competition and welfare consequences of review aggregators”

Abstract

Online review aggregators (e.g., Yelp or ClubKviar) provide detailed information about experience goods, such as restaurants and hotels. This study fosters our understanding of how such aggregators modify competition, profits and welfare. Using a spokes model ofhorizontal competition, I show that review aggregators enhance total welfare mainly by making valuable information available to consumers. The effect on welfare goes through different channels: 1) realised transactions are more valuable for the match between producers and consumers is more accurate; 2) the costumer base enlarges, for more agents find a suitable product; 3) the equilibrium price weakly decreases for competition amongst firms is more intense. However, firms face a prisoner dilemma: firms best strategy is to appear on the aggregator’s web so as to enlarge their market share, however, this leads to lower profits than if they all agreed not to make use of the aggregator.