Strategic Reviews

Abstract

The impact of product reviews on consumer purchasing behavior is empirically well documented. This can create perverse incentives for firms to offer reviewers side payments ("bribes") in exchange for biased reviews for their products. The presence of bribes distorts the information in reviews away from its first-best levels, and consequently leads to detrimental effects on consumer utility. This paper builds a dynamic two-sided reputation model where a reviewer can inflate her reviews in exchange for bribes. The problem the reviewer faces is the following: if she accepts bribes and misrepresents her reviews, then she builds her reputation as an inaccurate reviewer and eventually makes consumers less likely to follow her recommendations, which in turn makes firms no longer interested in offering her a bribe. Can the reviewer retain influence over consumers' purchasing decisions while simultaneously accepting bribes and misrepresenting her reviews? We provide a characterization of the environments that allow this kind of manipulation, and show that regulatory policies that aim to reduce bribes can lead to undesirable outcomes. Finally, we show that the absence of bribes can sometimes lead to the lowest possible consumer utility, and that the introduction of bribes in these environments can restore some of that utility via implementing second-best information transmission.