Product Ratings and Externalities

In this article, we investigate how information about production externalities, such as ecolabels, can be presented to create market pressure on firms to reduce these externalities. Specifically, we explore whether integrating information on externalities with consumer product ratings into a single combined rating can generate pressure to reduce externalities from all consumers, not just environmentally conscious ones. Theoretically, we demonstrate the existence of an equilibrium where producers invest in both high product quality and low production externalities. We show that under separate ratings, this equilibrium depends on a high proportion of “green” consumers, whereas a combined rating achieves similar results without such a requirement. More broadly, our model suggests that bundling ratings can compel producers to address niche concerns more effectively. We experimentally validate this prediction across two studies, confirming that bundling ratings significantly increases producer investment in additional attributes, such as reducing externalities, while maintaining the rating system’s ability to incentivize high product quality. This paper was accepted by Marie-Claire Villeval, behavioral economics and decision analysis. Funding: This research was financed by BI Norwegian Business School and the University of Bergen. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.04684 .