Optimal Simple Ratings
Year: 2026
Type: article
Abstract: ABSTRACT We study optimal simple rating systems that partition sellers into a finite number of tiers. We show that optimal ratings must be threshold partitions, and that for linear supply and Cournot competition with constant marginal cost, optimal thresholds solve a k‐means clustering problem requiring only the quality distribution. For convex (concave) supply functions, optimal thresholds are higher (lower) than the k‐means solution. For log‐concave distributions, two‐tier certification captures at least 50% of maximum welfare gains from full disclosure, with five tiers typically achieving over 90%. Applications to eBay and Medicare Advantage data illustrate our method.
Source: Journal of Industrial Economics
DOI: 10.1111/joie.70025
Authors: Hugo Hopenhayn, Maryam Saeedi
Language: English
Field: Decision Sciences
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,350
OpenAlex ID: W7135057142