The Power of Rankings: Quantifying the Effects of Rankings on Online Consumer Search and Choice∗

The Internet has led to an explosion of product choices facing consumers. When consumers face many options, intermediaries can help by ranking them, which in turn can influence how consumers search and what they ultimately purchase. To understand the role of intermediaries’ rankings, it is important to separate the effect of the position in which a firm is displayed in an intermediary’s listing and the characteristics of the firm. However, as intermediaries choose rankings to maximize their profits, rankings are endogenous, thus separately identifying their role is challenging. In this paper, I identify the causal effect of rankings by using a data set on hotel searches from Expedia that includes searches from an experiment where rankings were randomly generated. First, using detailed clickstream and purchase data, I show that (1) top positions lead to more clicks and purchases, but conditional on a click, higher ranked hotels do not generate more purchases and (2) that rankings mainly affect choices by reducing search costs, rather than expectations or direct utility. I then turn to quantifying the effect of rankings on consumer choices. To this end, I estimate a sequential search model and find position effects ranging from $1.85 to $3.73, lower than those typically found without experimental variation. Finally, I construct three counterfactuals to show how companies can use these results to design more effective rankings. First, I find that using the model’s estimates to construct a utility-based ranking leads to a sizable increase in consumer valuation of as much as $38.36 (21% of the purchase price). Second, I simulate consumer choices when search costs increase (as on mobile devices) and show that this would cost consumers as much as $16.23 (9% of the purchase price) in poorer matches and higher prices, highlighting the tension between consumer search costs and the impact of the ranking. Third, I evaluate the merits of a recently adopted approach at Amazon of only ranking independent hotels. Contrary to existing concerns about reducing the diversity of the listed hotels, I find that such a ranking benefits consumers by as much as $9.20 (5% of the purchase price), suggesting new avenues for improving the performance of a ranking.