Good rankings are bad - Why reliable rankings can hurt consumers

Ranking have become increasingly popular on markets for study programs, restau- rants, wines, cars, etc. This paper analyses the welfare implication of such rankings. Consumers have to make a choice between two goods of unknown quality with exogenous presence or absence of an informative ranking. We show that existence of the ranking might make all consumers worse o¤. The existence of a ranking changes the demand structure of consumers. With rigid prices and rationing, the change can be detrimental to consumers due to its e¤ect on rationing. Furthermore, this change in demand can also be detrimental due to consumption externalities. Finally, with perfectly ?exible prices the ranking might increase the market power of ?rms and hence lead to losses for all consumers.