Platform Governance Through Consumer Screening: A Theoretical and Empirical Analysis

In the sharing economy, screening can mitigate information asymmetry between service providers and consumers, but excessive screening may cause market inefficiency. We adopt a multimethod approach to examine how forgoing screening affects competition in the sharing economy. We first develop a game-theoretic model to analyze how a focal service provider’s decision to forgo screening impacts its own and a rival provider’s prices, market demands, and profits. Using Airbnb as the investigation context, we then empirically validate our analytical results. We find that our key analytical and empirical findings are consistent. Specifically, due to aggressive responses from rival providers, a low-rating focal provider may lower its service price after forgoing screening despite its increased attractiveness to consumers. Intriguingly, forgoing screening cannot increase a provider’s demand if its rating is high, whereas the demand for rival providers will increase. Moreover, our analysis reveals that in markets with relatively high competition intensity, forgoing screening benefits all three parties—the focal provider, rival providers, and the sharing platform—thereby improving the total social welfare. Based on these findings, we suggest that sharing platforms should encourage high-rating providers to forgo screening as a strategic approach to enhance the overall market performance. Furthermore, special attention is needed to prevent a decline in social welfare when the provider forgoing screening has a low rating, while its rivals have high ratings. Our findings reveal that platform governance through feature-level design can directly enhance platform profits at the expense of social welfare, thereby creating misaligned incentives and calling for external regulation.