“The Economic Value of a Star: The Effect of
Superfluous Ratings and Quality Dispersion” *
Steven Huff
June 26, 2007
Abstract
This paper examines how willingness to pay is
influenced by simplified information about product quality (i.e., product
ratings such as stars, diamonds, etc.) when presented alongside the absolute
quality information upon which the simplified information is based (i.e., the
ratings are superfluous). Though absolute quality is often presented on a
continuous scale, people use ratings to divide continuous quality into discrete
categories, despite that rating assignment rules are arbitrary; this
categorization of products in turn affects perceived quality. Thus, it is
important to understand how ratings influence willingness to pay. This paper
also investigates how willingness to pay is influenced by the dispersion of
quality in a product menu. While quality information is frequently absolute
(e.g., an airline’s on-time arrival rate can be measured as a percentage),
people often judge quality on a relative scale. It is therefore important to
know how the construction of the menu affects willingness to pay.
Two studies are employed to measure how willingness to
pay is affected by 1) quality ratings in the presence of absolute quality
information, and 2) the distribution of quality in the choice set.
Three-hundred and three subjects participated in the two studies and were asked
to indicate their willingness to pay for multiple products in up to five
product categories.
Results indicate that absolute product quality is an
inadequate predictor of willingness to pay, despite that it contains all
information about a specific product. In addition, willingness to pay for a
product is influenced by the product’s quality rating (which is simplified from
absolute quality) and its standardized quality (i.e., the z-score of a
product’s quality in relationship to the distribution of quality in the product
menu). Specifically, the results of this study reveal three distinct effects:
1) the lens effect; that is, willingness to pay is sensitive to simplified
quality information (i.e., ratings), suggesting that when consumers determine
their willingness to pay for a product, they use the product’s rating to help
them “zero-in” on a subset of the menu for comparison. 2) The expansion effect;
that is, the willingness-to-pay range for a menu of products increases when
quality ratings are included despite that quality remains constant, suggesting
that ratings increase perceived product differentiation between rating levels.
3) The z-effect; that is, willingness to pay increases with a product’s
standardized quality (i.e., the product’s quality z-score) implying that
consumers consider the distribution of quality in the menu when judging a
product’s value.
* Job Market Paper
Committee: Teck H. Ho (Advisor),
Ganesh Iyer, Eduardo Andrade, Stefano DellaVigna