Manipulation Through Biased Product Reviews
60 Pages Posted: 14 Nov 2017
Date Written: November 8, 2017
We analyze an information manipulation game in which consumers estimate the quality of a product using product reviews as a noisy source of information. A firm, whose product quality is either 'high' or 'low', exerts costly and hidden efforts to insert bias into product reviews. We first consider a case in which the price is uninformative about quality. We show that, in equilibrium, there is wasteful spending on manipulation by both firm types. Depending on the price level, either one type or both types enjoy higher sales compared to a situation in which there is no manipulation. Thus, the price level governs whether the bias in product reviews benefits or harms the consumers. A regulator can increase consumer surplus by charging a fixed fee to the firm for access to product review platforms. When we allow for informative pricing, we find that there are partially separating equilibria in which the low-type firm randomizes between choosing a low price and the high price that the high-type firm would choose. We show that in these equilibria, biased product reviews still influence demand. However, unlike the high-type firm, which can increase its sales through manipulation only at sufficiently high levels of prices, the low-type firm enjoys higher sales through manipulation at any admissible price.
Keywords: Information Manipulation, Bayesian Inference, Product Reviews, False Advertising, Price Signaling, Signal-Jamming
JEL Classification: D8, K4, L1, L4
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