When More is Less: Quality and Variety Trade-off in Sharing Economy Platforms

Platform owners often attempt to reduce information asymmetry between sellers and buyers by redesigning how users interact. One widely used platform design is to sort (i.e., rank) incumbent sellers based on their buyer-generated ratings within a geographical area. We theorize that this mechanism may indirectly limit the entry of low-quality sellers to the platform and therefore increase overall platform quality, but it may also reduce variety. As incumbents adjust their strategies to gain a display advantage, the competition effect functions as an additional barrier to sellers who would otherwise enter the platform. We use an extensive dataset from a sharing economy platform to identify sellers' heterogeneous strategic responses at the market level. Our results highlight that platform owners may face an unintended trade-off between product quality and variety at the local level when they design their rating systems.