Abstract
On platforms with peer-to-peer reviews, new products face a cold-start problem: consumers who buy and review an unreviewed product reveal information that benefits future consumers, generating an externality. We quantify this externality, evaluate how sellers’ decisions determine its magnitude, and analyze policies aimed at internalizing it. We use a structural model of Airbnb listings in Manhattan with short-lived consumers and long-lived hosts. We estimate that the informational externality is $40, roughly 3% of a weekly stay’s price. Market selection through entry and exit accounts for roughly 60% of the externality. Hosts’ dynamic pricing dampens it. Without any supply-side response, the externality would be 2.5 times larger. We evaluate three targeted policies: an entrant booking subsidy, a first-review bonus, and a seeded-review program in which the platform provides the first review. The first two policies produce similar total welfare gains, but only if hosts fund the policy through a lump-sum fee do they make consumers, hosts, and the platform all better off. The seeded-review program delivers the largest welfare gain among the three policies, but is profitable for Airbnb only if the cost of seeding a review is low.
