The Impact of Fake Reviews on Demand and Welfare

Although fake online customer reviews have become prevalent on platforms such as Amazon, Google, and Facebook, little is known about how these reviews influence consumer behavior. This paper provides the first experimental estimates of the effects of fake reviews on individual demand and welfare. We conduct an incentive-compatible online experiment with a nationally representative sample of respondents from the United Kingdom. Consumers are asked to choose a product category, browse a platform resembling Amazon, and select one of five equally priced products. One of the products is of inferior quality, one is of superior quality, and three are of average quality. We randomly allocate participants to variants of the platform: five treatment groups see positive fake reviews for an inferior product, and the control group does not see fake reviews. Moreover, some participants are randomly selected to receive an educational intervention that aims to mitigate the potential effects of fake reviews. Our analysis of the experimental data yields four findings. First, fake reviews make consumers more likely to choose lower-quality products. Second, we estimate that welfare losses from such reviews may be important - on the order of .12 dollars for each dollar spent in the setting we study. Third, we find that fake reviews have heterogeneous effects. For example, the effect of fake reviews is smaller for those who do not trust customer reviews. Fake reviews also have larger effects on those who shop online more frequently. Fourth, we show that the educational intervention reduces the adverse welfare impact of fake reviews by 44%.