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Ms. Xiuyi (Sherry) He
Ph.D. Candidate in Marketing
UCLA Anderson School of Management
University of California, Los Angeles

I study how rating system design affects innovation incentives. In settings in which product quality cannot be observed prior to purchase, online ratings serve as a signal of product quality for consumers and affect demand. Owing to their impact on sales, ratings also motivate firms to innovate. If firms use displayed ratings to guide their investments in improving product quality, then platform rating aggregation policies can play a key role in increasing or decreasing firms’ innovation incentives. I study the impact of online rating systems on innovation incentives and, more importantly, the implications of the design of the rating aggregation policy. After collecting a unique firm-level dataset from a mobile game app platform, I combined reduced-form analysis and a structural model to show how rating systems can be optimized for innovation. I show that innovation has a positive impact on all key rating system metrics and that a lower rating significantly increases innovation incentives. Building on empirical evidence, I develop a dynamic structural model to represent firms’ forward-looking behavior and estimate innovation cost. I then evaluate the impact of alternative rating aggregation policies on innovation incentives. The counterfactual analysis shows that placing greater weight on recent ratings can increase the innovation rate substantially.