The Taste Trap: How Consumer Reviews Distort Quality Investment

We investigate how biased consumer reviews affect monopolistically competitive firms’ investment in the quality of experience goods. Review bias arises because consumer evaluations reflect not only true quality but also idiosyncratic taste, generating ratings that are inflated relative to underlying quality. We show that, compared to a benchmark with fully informative reviews, firms may either underinvest in quality despite the upward bias in ratings, or overinvest; similarly, quality provision may fall short of or exceed the level chosen by a welfare-maximizing planner. We also characterize conditions under which review bias induces firms that are less efficient in delivering quality to choose higher quality than more efficient competitors or to choose lower quality yet earn higher profits. Next, we examine improvements in review informativeness arising, e.g., from tools that systematically collect feedback from verified buyers or use AI to summarize product reviews. We show that unilateral adoption of these tools lowers the adopting firm’s profits, whereas market-wide adoption may raise industry profits without necessarily mitigating quality distortions. Finally, we derive conditions under which initiatives aimed at enhancing trust in the review system, e.g., regulation of review manipulation, further exacerbate underinvestment.