Two-sided Adverse Selection and Bilateral Reviews in the Sharing Economy

Online peer-to-peer platforms match service providers with consumers. Both providers and consumers derive heterogeneous payoffs depending on whom they are matched with. To ensure that providers and consumers identify the most valuable matches, many of these platforms elicit relevant information from and also disclose the information to the market participants by adopting bilateral review schemes. Although the bilateral review scheme has its own merits in reducing information asymmetry and possibly enabling better matches, its impact on the various stakeholders in online peer-to-peer platforms remains unexplored. We show that, in equilibrium, the bilateral review scheme intensifies price competition among service providers to attract low-cost consumers and consequently reduces the platform\u27s profit. Interestingly, service providers may be better off with more intense price competition and lower prices when the proportion of low-cost consumers is sufficiently high. More importantly, we find that social welfare is not always higher under the bilateral review scheme compared to either the unilateral review scheme or no reviews. Our findings demonstrate that even though the bilateral review scheme eliminates the information asymmetry and adverse selection on both sides of the market, it does not necessarily enhance market efficiency when competing providers strategically respond to reviews by adjusting their prices