Fake Reviews and Naive Consumers

Boris Knapp ()
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Boris Knapp: https://econ.univie.ac.at

Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: User-generated reviews like those found on Amazon, Yelp, and similar platforms have become an important source of information for most consumers nowadays. It is therefore tempting for firms to manipulate reviews in order to increase demand for their products - but not all consumers are aware of this. We show that in a simple model with fake reviews and naive consumers the unique equilibrium is characterised by partial pooling, where fake reviews blend in with real ones and are persuasive. Policies that reduce the share of naive consumers have opposing effects on the two consumer groups: naives benefit, while sophisticates are harmed. A policy maker concerned with aggregate consumer welfare is thus facing a non-trivial problem. We further show that when real reviews are written strategically, they are not always truthful. Given sufficiently favourable market conditions, the equilibrium where all real reviewers are strategic is outcome equivalent to one where all consumers are sophisticates. In the context of online platforms, where the boundary between consumers and reviewers is fluid, this equivalence result has important practical implications.

JEL-codes: C72 D82 L15 (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-com, nep-gth, nep-mic and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:vie:viennp:vie2102

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