Ratings design and barriers to entry
2026-07-09
I study the impact of consumer reviews on the incentives for firms to participate in the market. I develop a model of endogenous entry in which firms produce goods of heterogeneous, unknown quality. Consumers engage in directed search, and prices are exogenously fixed. A rater uses consumer reviews to construct firm‐specific ratings that are informative of quality and help consumers direct their search. The main insight of the paper is that suppressing the reviews of highly‐rated firms strengthens entry incentives and improves consumer welfare.