HKUST Business Review

2 Shin Dongwook is an associate professor of operations management at HKUST, focusing on e-commerce, operations management, revenue management, probability models, and online social network systems. This article draws on the research paper “Product Quality and Information Sharing in the Presence of Reviews,” authored by SHIN Dongwook and Assaf ZEEVI. 40 HKUST Business Review Insight Limiting data in these ways reduces the potential for manufacturers to adjust prices or quality opportunistically. While it’s important to provide enough data that sellers can learn to design high-quality products, information shading helps platforms offer the “just right” amount of transparency, which will depend on the type of product, customers’ sensitivity to reviews, and the maturity of partner relationships. Leverage the advantages of AI ethically. In addition, this Goldilocks’ Effect only emerges when seller- platform contracts are structured with a standard wholesale model. When the manufacturer sells at a fixed wholesale price and the platform adds a retail markup, each firm optimizes for its own margin, not total value creation. As such, when possible, avoiding this model entirely can help better align everyone’s incentives. Specifically, shifting to a commission model where the manufacturer retains pricing power and pays the platform a fixed percentage of every transaction means sellers feel both the benefits and costs of pricing decisions, giving them more reason to invest in quality. Similarly, because the platform earns a cut of every sale, it benefits from higher demand and customer satisfaction rather than higher margins. This ultimately means that information sharing becomes less risky, since the manufacturer can’t manipulate wholesale prices, so all parties can benefit from greater access to data without falling prey to the misaligned incentives that emerge in a wholesale arrangement. For example, in contrast to its wholesale Vendor Central platform, Amazon’s Seller Central operates on a commissions basis, naturally encouraging higher product quality and more efficient pricing. Because the platform and manufacturers share incentives around demand rather than markups, they tend to compete on quality and customer experience rather than inflating prices. As a result, the platform, seller, and customer all benefit. The Impact of Transparency Depends on the Structure of the Marketplace Ultimately, our research highlights that the true impact of transparency depends on the structure of a given marketplace. In a commission-based market, more transparency is generally better — but in a wholesale market, a Goldilocks’ Effect may take hold, in which too much transparency actually worsens outcomes for everyone. Interestingly, similar dynamics may come into play beyond e-commerce. Travel platforms, fintech systems, and gig economies where riders rate drivers, clients review freelancers, or borrowers review lenders all produce public signals that can influence internal contracts and trigger inefficiencies. We can even see comparable patterns in industrial supply chains: Automotive OEMs typically share performance data with suppliers, but too much visibility can tempt price hikes or opportunistic behavior. Relatedly, well-intentioned regulatory pushes for transparency such as open banking or health data portability can face the same issue: When information flows freely without thoughtfully constructed incentives, firms may underinvest in quality, security, or innovation. Transparency Is a Powerful Tool. Use It Wisely. The goal is not secrecy. Transparency is an important ingredient of a healthy ecosystem — but it’s not the only ingredient. Platforms thrive when their ecosystems reward quality and reliability. Manufacturers succeed with access to relevant insights that guide product development. Customers win when reviews offer meaningful information. To ensure incentives are aligned (and stay aligned), business leaders must recognize the true complexity of transparency. They must design systems intentionally, acknowledging the ways in which sharing information may negatively influence product quality and price, and where possible, they should consider either shading information or switching to a commission-based model to better align incentives. After all, in a platform economy, transparency is power…but only if you know how to wield it.