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In online retail marketplaces, consumers learn more about products through reviews or ratings, which can then increase their willingness to buy. HKUST’s Zijun (June) Shi and colleagues assess the optimal level of information disclosure in these reputation systems, which can reduce the information asymmetry between sellers and consumers. As the researchers point out, “consumers know there are both authentic and fake Chanel bags in online marketplaces, but they cannot tell which is authentic by simply looking at the product pictures and descriptions.”

“We are curious whether some degree of hidden information is beneficial—despite creating information asymmetry— for the platform’s profit,” say the authors. Although conventional wisdom suggests that marketplaces should resolve information asymmetry between sellers and consumers, this may not always be the best approach for maximising profit.

Many leading consumer platforms choose to hold some information back. “What is the optimal amount of information to be disclosed in an online reputation system?” ask the researchers. They create three scenarios to assess the outcomes of full, partial, and no disclosure of customer ratings. They then examine the tendency to under-invest or to improve quality and the resulting effects on sales in these scenarios.

They find that when the investment cost is greater than the increase in quality, platforms may partially rather than fully disclose information. “If the profit brought by quality improvement dominates the loss caused by information asymmetry,” the researchers note, “the platform will prefer partial disclosure.”

The researchers thus reveal a telling aspect of online selling: “some platforms may have discovered empirically that the full truth hurts profits, so they hide information without a clear understanding of the underlying reasons nor the optimal solution.” Their study provides a comprehensive explanation of these reasons and suggests an optimal balance between profit and transparency.