Electronic Word of Mouth and Consumer Protection: A Legal and Economic Analysis

Abstract

The most fundamental challenge in consumer protection law lies in the information asymmetry that exists between merchants and consumers. Merchants typically know far more about their products and services than consumers do, and this imbalance threatens the fairness of consumer contracts. However, some scholars now argue that online consumer reviews play a crucial role in bridging the information gap between merchants and consumers. According to this view, consumer reviews are an adequate substitute for some of the legal protections that consumers currently enjoy.

This Article demonstrates that such optimism is unfounded. Consumer reviews are—and will remain—a highly flawed device for protecting consumers, and their availability therefore cannot justify dismantling existing legal protections. This conclusion rests on three main arguments. First, there are fundamental economic reasons why even well-designed consumer review systems cannot eliminate information asymmetries between merchants and consumers. Second, unscrupulous merchants undermine the usefulness of reviews by manipulating the review process. While current efforts to stamp out fake reviews may help to eliminate some of the most blatant forms of review fraud, sophisticated merchants can easily resort to more refined forms of manipulation that are much more difficult to address. Third, even if the firms operating consumer review systems were able to remedy all the various shortcomings that such systems have, it is highly unlikely that they would choose to do so: by and large, the firms using review systems lack the right incentives to optimize them.