The Good, The Bad and The Picky: Reference Dependence and the Reversal of Product Ratings

Abstract

We study the impact of consumer quality-based self-selection on online reviews. Consumers differ in their expertise, which has two effects. First, expertise is instrumental to choice: Experts purchase better products than Non-Experts. Second, because of their superior choices, Experts endogenously form higher reference points, which leads them to post harsher ratings for a given quality. Combined, these two facts imply a bias against higher-quality products. When this bias gets large, ratings are non-monotonic in quality: lower-quality products can obtain higher ratings than superior alternatives, thanks to the lower standard they are held to.