Abstract
To reduce sellers’ manipulation of online reviews, platforms conduct audits and impose penalties on abusive practices. In this article, we study the effectiveness of self-regulation in preventing fake reviews and increasing consumer and social welfare. To this purpose, we use a Stackelberg model with the platform as the leader. Our major contribution is to explain the auditing game between the platform and the seller. These are our major findings. First, we found a self-regulation’s Achilles’ heel. Despite its noble intent, the self-regulation system often falters. Why? The platform faces a powerful incentive to accommodate fake reviews, especially when consumers heavily rely on the seller’s information and regulatory repercussions remain mild. For this reason, consumer activism and external supervision are the key factors leading the platform to audit the seller. Second, we discovered the paradox of fake reviews, establishing the conditions under which, counter-intuitively, fake reviews create social value. Finally, by considering an endogenous retail price, we found evidence of a complex relationship between pricing, auditing, and review manipulation policies, all dependent on consumer sophistication and product quality, which can only be analyzed numerically, as there is no closed-form solution.
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