HKUST Business Review

CAN TRANSPARENCY BACKFIRE? SHIN Dongwook Authored by When sellers have too much access to information, it can actually worsen outcomes for platforms, sellers, and customers alike. 38 HKUST Business Review Insight INFORMATION SHARING hat’s the promise of review-driven platforms like Amazon, JD.com , Taobao, and countless others. When prospective customers can see other buyers’ reviews, manufacturers are incentivized to boost quality, platforms sell more products, and everyone wins. But do these digital marketplaces actually foster the “product meritocracy” that Bezos envisions? My new research suggests that it’s not so clear-cut. While the increased transparency these platforms offer can enable customers to make more informed buying decisions, it can also create incentives that actually end up driving up prices and reducing product quality — which ultimately harms customers, platforms, and sellers alike. These counterintuitive dynamics emerge because customer reviews are in fact only one of many sources of data that sellers have access to. In addition to reviews, platforms have enormous troves of data regarding metrics such as sales velocity, customer demographics, return rates, and search behavior, which they can choose to share with manufacturers (typically for a fee). In other words, reviews are far from sellers’ only window into customers’ feelings about their products. In fact, product reviews provide sellers with even greater visibility into their products, building on their substantial existing insight into customer behavior…and this additional information may or may not ultimately benefit them. A Transparency Goldilocks’ Effect In theory, one might assume that there’s no such thing as “too much” transparency. Isn’t more information always better? But in practice, my analysis suggests that there is a Goldilocks’ Effect when it comes to providing manufacturers with visibility into customer data: Too little transparency, and manufacturers can’t learn enough to design high-quality products, so they hedge by just selling cheap, low-quality products. But too much transparency, and they increase their prices so opportunistically that platforms can’t make a profit. It used to be that if you made a customer happy, they would tell five friends. Now with the megaphone of the internet, whether online customer reviews or social media, they can tell 5,000 friends…Rather than inferior products shouting louder, we have sort of a product meritocracy. It’s very good for customers, it’s very good for the companies that embrace it — and it’s very good for society. — Jeff BEZOS Founder of Amazon