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Rating systems, widely used in online transactions, often reduce buyers' diverse
opinions to summary statistics. To explore the consequences of this coarse aggregation,
we analyze a dynamic adverse selection model where buyers share anonymous
evaluations via a rating system. With heterogeneous buyers, the seller is tempted
to secretly lower prices to attract favorable ratings from price-sensitive buyers. That
leads to sporadic flash sales. The seller's incentive to manipulate ratings is, however,
self-defeating. Our analysis illustrates how the rating system shapes the allocation of
surplus and offers insights for platform and product design.
