Revealed preference in online reviews: Purchase verification in the tablet market

Abstract

The review systems of online platforms create a stream of online word-of-mouth that allows consumers to learn from others' purchasing experience. However, it is difficult for consumers to discern the authenticity of a review or the reviewer's level of experience with the product. Platforms can aid the authentication process by incorporating a verified purchase (VP) indication, or “badge” as is done on Amazon, in reviews where the consumer writing the review has verifiably purchased the focal product. A VP is a revealed preference for a product implying a utility-maximizing choice where the consumer writing the review has experience with the product. Combining an Amazon dataset on tablet computers with the theory of revealed preference in online reviews, we uncover a surprising new result: the proportion of VP reviews (a revealed preference) is associated with higher future sales, and the effect of the proportion of VP reviews on sales dominates the effect of the mean rating. This novel use of VP with revealed preference theory has implications for new research in the design of recommendation systems, detecting fraudulent reviews, and online profiling/privacy. Moreover, the use of a VP badge is immediately applicable to firms and platforms.