The genesis of this article was the author’s curiosity about whether consumers use strategies to protect them from being ripped off when buying products and services online, and if so what those strategies are. There are a range of risks attenuating online purchasing. Consumers can just as easily buy products from sellers within their jurisdiction as from those outside. Purchasing outside jurisdiction is particularly risky because of the considerable difficulties a consumer faces in enforcing their legal rights. Other risks include purchasing goods that do not arrive, or receiving unwanted or defective goods. Physical products such as clothing, shoes, and furniture cannot be physically examined or tried on before purchase, unless the online seller offers a no-cost or low-cost returns policy (Chu et al. 2005, p. 116). Even then, a consumer is required to deal with the delays, costs, and inconvenience of returning an unwanted, unsuitable, or defective product. The risks relative to the real world are less pronounced in the case of electronic products such as music, movies, ringtones, and computer games and programmes. Here, products can often be sampled online prior to purchase. Additional risks confronting online consumers include threats to their privacy and security, fraud, and immature legal protection mechanisms (Chu et al. 2005, p. 116; Datta and Chatterjee 2008, p. 16; Flanagin et al. 2011, p. 1, 1).

Yet, despite the risks, it appears the rate of consumer complaints for online purchasing is about the same as for real-world purchasing. The UK Office of Fair Trading, for instance, undertook a comprehensive survey of 4 000 consumers during 2010 and found that online problems accounted for 4.6% of complaints, which compared well with the average of 5% for all consumer contracts complaints (Office of Fair Trading 2011, para 2.10). The OFT found that most problems “resulted in zero or low detriment” to the consumer. The median financial detriment was less than £5. The average financial detriment, however, was £250, suggesting that when matters do go wrong, they do so spectacularly (Office of Fair Trading 2011, para 2.3). The comparatively low rate of complaints about online transactions is counter-intuitive given the risks involved. One possible reason, it can be speculated, is because online sales presently represent a relatively low proportion of overall retail sales, although online sales are rapidly growing (see Part I, below). Also, online consumers may be reasonably savvy at protecting their own interests, a circumstance that may change as more consumers buy online.

Curiosity about possible strategies consumers use to protect them from misleading and deceptive online market conduct led the author to hold four focus group sessions with consumers who had purchased products or services online during the previous 12 months. The interviews were semi-structured, with the aim of allowing participants to speak for themselves, without being overly directed by any presuppositions held by the interviewer (namely the author). A number of themes arose from the focus group sessions: Participants were highly enthusiastic about their online purchasing experiences, with relatively low prices seen as one of the greatest advantages; they were relatively unconcerned about online privacy; and they relied heavily upon consumer reviews when making decisions about which products they would buy and from which sellers they would purchase the products. The nature of the focus group research and its outcomes is detailed in Parts II and III. This article deals with consumer reliance on online reviews because it was a dominant theme during all sessions and because it resonated with the initial research question.

A review was undertaken into the research literature regarding the extent to which consumers use consumer reviews when making online purchasing decisions and the way in which they use obtained information. The evidence is consistent with the responses of focus group participants, who said that they place considerable trust and reliance on online consumer reviews. A 2009 Nielsen poll of over 25 000 Internet consumers from 50 countries found, for instance, that 70% of participants trusted consumer online opinions (Nielsen 2009). The literature diverges, however, on the question whether the use of consumer reviews assists in overcoming information asymmetry between online buyers and sellers. Some researchers claim that the Internet greatly assists with overcoming asymmetry problems because of the ready means it provides for consumers to learn from the experiences of others through online reviews. Other commentators claim that fake reviews are so prevalent and are of such sophistication that they are rendering the use of consumer reviews largely ineffective. The evidence that fake reviews are undermining market effectiveness is compelling. The evidence is detailed in Part IV.

Part V argues that governments and regulators should take the problem of fake reviews and reviewers seriously. Failure to do so risks consumers losing confidence in the marketplace and the development of a “lemons market.” This is neither in the interests of consumers nor legitimate traders, nor is in the broader community’s economic and social interests. Although there are laws in many jurisdictions that forbid misleading conduct, such as fake reviews, regulators struggle to deal with the problem. Admittedly, cracking down on the conduct is complex and expensive. Part VI proposes that in dealing with the practice regulators need to take a “post-regulatory” approach. This involves using smart, lateral thinking approaches, and the deployment of resources and strategies beyond the standard command and control regulatory model. This article proposes that these strategies might include taking an alliance approach. The term “alliance approach” as coined in this article is used in both the descriptive and normative senses. Descriptive in the sense of describing aspects of strategies already used, to a greater or lesser extent, by regulators to work with regulated firms and industries to attain legislative and regulatory goals. Encouraging industry self-regulation through industry funded and operated consumer complaints ombudsman schemes is an example. The term regulatory alliance is also used in a normative sense to propose that regulators ought to adopt an alliance approach to attain public policy goals. Part VI outlines proposed steps for applying an alliance approach. Finally, the article outlines the ways in which the alliance approach can be applied to deal with fake online consumer reviews.

The Setting: The Online Consumer Marketplace

Online sales represent a relatively small, but rapidly growing, proportion of retail sales. According to the US Census Bureau, online sales accounted for 4% of total US retail sales during 2009, which amounted to $145 billion in revenue (US Census Bureau 2012 Statistical Abstract, Washington, DC, p. 662). In the UK, 12% of the retail sales during 2011 were online, accounting for £50.34 billion in revenue, up from 8.6% in 2008 (Centre for Retail Research 2012). During September, 2009 over 14 million UK households used the Internet to find out about goods and services, and between 2003 and 2008, the percentage of online advertising revenue generated grew from 3% to 20% of the advertising market (Office of Fair Trading 2010, para 1.1). Online retail sales during 2011 in Germany were 9% of retail sales and in France 7.3%. The average European proportion of online retail sales during 2010 was 8.8%, which accounted for sales of 232.76 billion €. The estimated European online retail growth for 2012 is 16%.

Australian online sales accounted for 5% of all retail sales during 2011 (Speedy 2012). During the previous year, approximately 36% of the population made at least one online purchase each month, and 6% bought at least one online product each week (Digitalmarketinglab 2010).

The Research Methodology

As mentioned at the outset, the catalyst for research reported in this article was the author’s curiosity about if and how consumers protect themselves from the risks of purchasing goods or services that are inferior or unwanted and how they ensure they are purchasing from reliable sellers. The focus group research method was chosen for initial exploration of these questions because it allows explorative flexibility and enables the researcher “to see reality from a client’s point of view” (Krueger 1994, p. 9). It also allows the researcher to collect data with an open willingness to learn from the participants and to explore new questions that are likely to emerge from the study (Lederer 2010, p. 158). This enables the generation of ideas and thoughts linked to the objects and concepts under analysis (Brito 2011, p. 520). It also enables taking a holistic perspective on an issue and gaining a contextual understanding of the research issues. The aim of the focus group interviews, therefore, was “to avoid predetermined outcomes, that is to say, using a less obtrusive means for attaining data” (Patton 1990, p. 132). The aim, therefore, was to gain a sense of the broad concerns, interests, and desires of focus group participants and to gain a general sense of the strategies they might adopt to avoid disappointment when purchasing products and services online.

Four focus group sessions were conducted by the author between 2 May and 10 May 2011 in Melbourne, Australia. Each focus group comprised of eight participants. Each participant was required to have purchased consumer goods or services on the Internet over the previous 12 months, which means they were drawn from the estimated 36% of the Australian population, based on 2010 figures, which had made at least one online purchase each month (Digitalmarketinglab 2010). The participants were selected by an independent marketing company, Phyllis Mitchell & Associates, which retains a database of the names of people who are willing to participate in market research studies.

The participants’ age groupings were as follows: 12 were aged between 18 and 25 years, 10 were between 26 and 35, five between 36 and 45, three between 46 and 55, and two were over 55 years of age. Sixteen participants held white collar jobs, seven blue collar, and nine were students. The overall number of participants was 32, of whom 16 were males and 16 females.

It is not claimed that the focus group participants were necessarily representative of the broader population of Internet users. The value of focus groups is usefully summarized by Gibbs:

Focus groups can help to explore or generate hypotheses (Powell and Single 1996) and develop questions or concepts for questionnaires and interview guides (Hoppe et al. 1995; Lankshear 1993). They are however limited in terms of their ability to generalize findings to a whole population, mainly because of the small numbers of people participating and the likelihood that the participants will not be a representative sample (Gibbs 1997).

In any event, Hernández et al. (2011) conclude as a result of their research that “the socioeconomic characteristics of the individual (age, gender and income) have scarcely any significance in the explanation of the behaviour of e-shoppers, once these have acquired experience with the channel” (p. 127). Their findings are consistent with the responses of the focus group participants, who showed no discernible differences in their accounts about their online shopping behaviour based on their age, gender, or income.

Some of the focus group participants claimed they had used the Internet quite extensively over the previous 12 months. One participant claimed he purchased all the goods and services he uses for day-to-day living via the Internet, including all his groceries. Other participants classified themselves as moderate to low users.

The interviews were semi-structured, so as to enable participants largely to determine the direction of the discussion. A discussion sheet was designed prior to the interviews which was used by the moderator (the author of this article) to broadly direct the discussion (see the “Appendix”).

The study did not interview consumers who suffer from a particular disadvantage, vulnerability or incapacity arising from their age, unfamiliarity with the language being used for the transaction, diminished mental capacity, poor education, or low income. The protection of vulnerable consumers in the online world ought to be of significant policy and regulatory interest; however, this is not the focus of this article. Rather attention is given here to ways in which regulators can build and maintain consumer confidence in the online marketplace more generally.

Consumers are able to purchase a wide range of goods and services online, including banking, telecommunications, and insurance services, as well as travel services, including airline tickets, hire cars, and accommodation, along with consumer goods. Focus group participants were not asked to ignore any categories of consumer products. Despite this, there was very little discussion about banking, telecommunications, or insurance services. It is possible that participants considered the online purchase of these products as relatively mainstream activities and therefore did not consider it necessary to distinguish them as a distinct online shopping experience. Alternatively, they associated online purchasing with the purchase of consumer goods rather than consumer services. Despite the focus on consumer goods, there was some discussion about the purchase of travel-related services, including the booking of hotel and other accommodation.

Results and Observations

Overall, the responses of focus group participants were overwhelmingly positive about their online shopping experiences. Even when invited to discuss negative experiences, participants tended to view any bad experience as causing them only relatively minor inconvenience or loss, or as offering a useful lesson for the future. A theme that was most pronounced in all focus group sessions was the extent to which participants sought and relied upon consumer reviews about products and sellers. Consumer reviews appear in the form of ratings systems and commentary on intermediary sites such as eBay, Amazon.com and TripAdvisor, Expedia, Priceline, Travelocity, Orbitz, and Hotels.com. Consumer reviews also appear in a wide array of other forms including on social networking sites such as Facebook and Google+, as well as in the form of blogs. Indeed, reviews will appear in any form of communication available on the Internet (Flanagin et al. 2011, p. 2).

The reliance that focus group participants said they placed on online consumer reviews is consistent with the findings of an online Nielsen poll taken in 2009 of over 25 000 Internet consumers from 50 countries. Ninety percent of consumers surveyed stated that they trust recommendations from people they know, whilst 70% trusted consumer online opinions. This compares with approximately 60% of respondents trusting advertisements in newspapers, magazines, and billboards and 55% trusting radio advertisements (Nielsen 2009). Other research confirms that consumers regard web-based information to be equally credible to that obtained from traditional media (Flanagin and Metzger 2000) and frequently turn to online ratings and reputation systems to assist with product and seller evaluations (Pinch and Kesler 2011, p. 12). The typical responses of focus group participants to the value they attach to consumer reviews can be illustrated by the response of one participant, who remarked that:

Reviews from other users are very helpful. They are much better than walking into a shop and hearing the shopkeeper rave about their own product.

This suggested that the participant placed a greater reliability on online reviews than the opinions and advice of a salesperson in a real-world store. Another indication of the reliance placed upon reviews arises from the comment by one participant that:

You can go back to the shop, but sometimes the seller is on the other side of Australia, or overseas, so you can’t go back and claim the warranty… So that’s where trust comes in… ratings, reviews.

Another participant stated that, “It’s the Internet, it’s not a lonely place,” suggesting that users sense that there are many other online consumers who can assist them with making purchasing decisions.

Although online consumers readily seek the views of other consumers about products and sellers, they are generally reluctant to offer their own views. The following comment made by one focus group participant was typical of the views held by other participants:

A grading system, a 5 minute survey? Sorry, I’m too slack, I couldn’t be bothered.

Given that consumers rely heavily upon online reviews, the question then arises as to how they use the information they obtain. According to Flanagan, when consumers use online reviews, they pay attention to contextual information such as a reviewer’s reputation and exposure (Flanagan et al. 2011, p. 3). He says that:

People place most importance on evaluating whether commercial website information is secure, up-to-date, and complete when determining the credibility of online commercial information, but next they rely on product ratings, comments, and reviews (among other factors) to make decisions about credibility and whether or not to purchase a product (Flanagan et al. 2011, p. 7).

Consumer assessments of the credibility of information are based on their perceptions regarding a source’s expertise, trustworthiness, or attractiveness, as well as upon judgements about the quality and accuracy of the information (Kwon and Sung 2012). Although it can be generalized that consumers adopt these approaches, the qualification needs to be made that more specific assessments about the way consumers process product information is quite complicated and hard to predict (Kwon and Sung 2012, p. 207).

Research suggests that consumers give negative information more weight than positive information (Kwon and Sung 2012, p. 208). However, consumers consider that reviews with extreme ratings are less helpful than those with moderate ratings (Danescu-Niculescu-Mizil et al. 2009; Kwon and Sung 2012, p. 207). The focus group participants also exercised a degree of caution regarding negative reviews. As one participant commented:

One bad review among hundreds of good ones is usually okay. On the other hand, if it’s one good review among only a few in total then you need to be more careful. They either don’t have a reputation yet, or they don’t have a bad reputation yet.

Another participant commented:

What does one [negative] review tell you?

Ironically, in some instances, a negative review left some participants with a positive impression of the product and the seller. One participant mentioned that he placed heavy reliance on reviews when deciding which hotels to book for a holiday in Vietnam. He noted that some reviewers had complained that the bathroom of a particular hotel was not properly cleaned. However, when he considered these complaints in the context of the low price of the accommodation and the splendid coastal views, the positives were seen to clearly outweigh the negatives.

Generally speaking, when consumers make decisions about purchasing products, they use intrinsic clues (which constitute the physical part of the product) and extrinsic clues (that are related to the product but do not constitute the product) for product evaluation (Chu and Song, p. 116). In the online environment, consumers are generally required to look for extrinsic clues. For instance, when considering whether to buy from an unknown seller on eBay, one focus group participant said:

You can see how many transactions a seller has made… 100% feedback combined with lots of sales is a good sign.

The responses of focus group participants were consistent with the observation by Kwon and Sung that:

…when consumers have difficulty in discovering product qualities and attributes prior to purchase and use, they rely more on fellow consumers’ purchase and usage experiences to reduce the ambiguity of judgemental criteria (Kwon and Sung 2012, p. 208).

Focus group participants expressed a reasonable degree of confidence in their abilities to detect misleading and fake reviews. However, a growing body of research suggests that consumers face an increasingly challenging environment for detecting fake reviews. Del Riego claims, for instance, that it is virtually impossible for an online consumer to determine whether a reviewer is genuinely expressing his or her opinion about a product or is influenced by other motivations (Del Riego 2009). The difficulties consumers face is discussed further in the following part.

Discussion: Fake Reviews

Many firms that sell products and services online and their marketing firms are well aware of the weight and significance consumers attach to online reviews (Forrest and Cao 2010, p. 88). Almost 80% of Fortune 100 companies are using at least one of the main social media platforms to communicate with their customers and encourage their views and participation in marketing campaigns, which is not to suggest that they necessarily do so in a misleading way (Forrest and Cao 2010, p. 89). The increasing popularity of sites that provide for user reviews, such TripAdvisor and Yelp, along with rapid growth of social media sites such as Facebook and Google+, no doubt increases the temptation to game the system with misleading or fraudulent reviews. Indeed, some marketing and other firms actively promote their ability to promote a seller’s products using social media, blogs, and other online websites (Ott et al. 2011, p. 309). In some cases, firms are using dubious and illegal means for promoting products, including through the creation of fake consumer identities and the payment of people to write fake reviews using those fake identities.

In some cases, the fakery of an online review is clearly egregious, such as the creation of false identities for the purposes of writing reviews, and in other cases, it involves borderline activities, such as where a restaurateur offers a customer a free coffee in exchange for the customer posting a review on a review site, such as urbanspoon.com (Sprague and Wells 2010, p. 417). Here the hotelier may well have no control over what the customer actually posts on the site, so the review may reflect genuine opinions despite the inducement.

Other more complex forms of online information manipulation also exist, including the rank ordering of information provided to consumers by search engines. The load time of webpages and their design and a whole wide range of other manipulations to present information also exist, without the consumer being aware of the manipulation. According to Lankes, consumers:

… are simply unable to, or fail to, recognize many of the more technical influences on the information with which they are provided in the first place. In fact, there is a great deal of information manipulation that occurs that is never perceptible to the user. Built into the tools themselves are filters, assumptions, biases, and outright distortions that can never be factored into a user’s credibility decision (Lankes 2008, p. 104).

Various names are given to misleading online activity, from the more euphemistic “online reputation management” (which in some cases may involve countering misleading conduct, but in other cases engaging in it) (Cole 2011); to terms such as opinion or review spamming; buzz, stealth, and masked marketing (Sprague and Wells 2010); and astroturfing. “Buzz marketing” involves inviting or encouraging consumers to voluntarily promote products in return for inducements such as coupons or discounts. In other cases, it involves a more elaborate online marketing campaign. A stealth campaign involves the promotion of products by “consumers” whose identities are masked and may well be faked (European Parliament 2010, para 1.2.1; Sprague and Wells 2010, p. 419). The term “astroturfing” was apparently coined by a former US Senator in 1985 to describe lobbying letters he believed were generated mail from the insurance industry. AstroTurf® is a brand of artificial grass. Just as AstroTurf is fake grass, astroturfing is fake a grassroots campaign. The term has evolved to also mean methods used by marketeers and others to give potential consumers the impression that ordinary online users are recommending a particular product when in fact the recommendations are made by or on behalf of the seller (Lankes 2008, p. 114). The activities listed below are examples of the more egregious forms of misleading conduct taking place in the online consumer marketplace:

  • The Internet abounds with advertisements offering fake reviews for a price (Ashton 2012; Wall Street Times 2012).

  • Group reviewers who work collaboratively to write fake reviews have been found to be prevalent (Mukherjee et al. 2012).

  • Technological systems that create fake identities, including the fake person’s name, e-mail account, webpages, and social media, were discovered by US cyber-security, HBGary Federal. “Human Astroturfers” were then assigned those accounts to create a back story (Monbiot 2011).

  • The Times newspaper in the UK discovered that hotel owners were paying up to £10 000 to agencies so as to improve their travel review rankings (McCracken 2011).

  • The UK Office of Fair Trading recently accepted legal undertakings from MoreNiche Limited, a company that runs an online network with nearly 150 000 affiliate marketing businesses worldwide that market products such as diet aids and teeth whitening products. The company was alleged to have breached the Consumer Protection from Unfair Trading Regulations 2008 by not disclosing to users that affiliate promotions were paid for by a commercial firm and that editorial content was not written by the apparent author (Office of Fair Trading 2012).

  • A New York plastic surgery franchise entered a $300 000 settlement with the New York Attorney General’s department for posting fake online consumer reviews (Miller 2009).

  • The UK Advertising Standards Authority ruled that the claim made on TripAdvisor’s site of “trusted advice from real travellers” was misleading because fake comments could be posted without verification (Wall Street Times 4 April 2012).

Forrest and Cao provide the following further examples:

  • A representative of [a] global computer hardware manufacturer was recently caught paying users to leave positive reviews for its products on Amazon and Buy.com.

  • The marketing division of a textbook company was recently forced to cancel their strategy of giving $25 Amazon gift certificates to every user who rated their textbooks positively on the site.

  • Interns of a PR firm representing many makers of applications for Apple’s iPhone, were caught rating its clients’ products positively on Apple‘s Application Store.

  • Colleen Padilla, a 33-year-old mother of two who lives in suburban Philadelphia, has reviewed nearly 1,500 products, including baby clothes, microwave dinners and the Nintendo Wii, on her popular Web site Classymommy.com. Her site attracts 60,000 unique visitors every month, and Ms. Padilla attracts something else: free items from companies eager to promote their products to her readers.

  • Izea, an online marketing company based in Orlando, Fla., which created PayPerPost, says it has 25,000 active advertisers ranging from Sea World to small online retailers. It feeds to 265,000 bloggers in its network, and pays, on average, $34 a post (Forrest and Cao 2010, pp. 90–91).

According to Lim et al., it is not clear how much review spam exists in online product review sites, “but their existence causes several problems including unfair treatment of products either independently or in comparison with other similar products” (Lim et al. 2010, pp. 939–940). Lim et al. also observe that:

Due to the openness of product review sites, spammers can pose as different users (known as ‘sockpuppeting’) contributing spammed reviews making them harder to eradicate completely. Spam reviews usually look perfectly normal until one compares them with other reviews of the same products to identify review comments not consistent with the latter (Lim et al. 2010, p. 940).

Illegality

The more egregious forms of misleading and deceptive practices are unlawful in many countries. In December 2009, the US Federal Trade Commission formally instituted guidelines covering online testimonials and endorsements. The guidelines set four requirements: “(1) the advertiser has a duty to educate blogging endorsers regarding the guidelines, (2) the endorser has a duty to write an honest review, (3) the endorser has a duty to disclose any material relationship between him/her and the advertiser, and (4) the advertiser has a duty to monitor the endorser’s blogs and online outlets to ensure they are not deceptive to consumers” (Forrest and Cao 2010, p. 90). Regulatory measures to ensure compliance include cease and desist orders and fines of $16 000 per day per violation. Violators can be ordered to make full or partial customer refunds and can be required to make corrective advertisements.

The European Union’s directive Unfair Commercial Practices Directive requires the prohibition of the use of “editorial content in the media to promote a product where a trader has paid for the promotion without making that clear”…and “falsely representing oneself as a consumer.”Footnote 1 The EU Directive on Misleading and Comparative Advertising requires prohibitions on unfair trading practices, including denigrating competitors and creating confusion in the mind of consumers.Footnote 2 The UK Consumer Protection from Unfair Trading Regulations 2008 prohibit “falsely representing oneself as a consumer” when promoting a product to consumers. The maximum penalty for a breach is 2 years imprisonment and/or an unlimited fine. In addition, the UK advertising industry has developed a number of voluntary codes of conduct, including the Code of Non-broadcast Advertising, Sales Promotion and Direct Marketing, the most recent version of which came into force on 1 September 2010. Article 3.1 of the Code requires that marketing communications must not materially mislead or be likely to do so, Article 3.5 requires that the communications not materially mislead by omitting the identity of the marketer, and Article 3.45 requires that marketers hold documentary evidence that a testimonial or endorsement used in a marketing communication is genuine, unless it is obviously fictitious. Marketeers must also hold contact details for the person who, or organization that, gives endorsement. Complaints for alleged breaches are dealt with by the Advertising standards Authority, which is an independent industry funded body.

In Australia, Section 18 of the Australian Consumer Law prohibits misleading and deceptive conduct. There are a broad range of penalties and remedies that can be applied if there is a breach. The courts interpret the scope of “misleading and deceptive conduct” very broadly. In the recent case of Australian Competition and Consumer Commission v Google Inc,Footnote 3 for instance, the Full Federal Court found that the display of sponsored links in response to a user’s Google search queries that listed the name of an advertiser’s competitor above the advertiser’s URL link to their webpage constituted misleading and deceptive conduct. There is little doubt that the more egregious forms of fake reviews, at least, constitute misleading and deceptive conduct. The vast majority of Australian misleading and deceptive conduct actions are not brought by the regulator (the Australian Competition and Consumer Commission), but by competitors. This has, since the introduction of the provision in 1975, given the provision powerful effect. It has also enabled the attaining of the policy objectives of the provision without overburdening the stretched resources of the regulator.

Information Asymmetry

Enforcing laws and industry standards to reduce the incidence of fake reviews admittedly is difficult as they are hard to detect, and in some cases, the breaching party is outside the regulator’s jurisdiction. Even if the party is within jurisdiction, it is often difficult proving that a reviewer was paid by a business to write a review (European et al. 2010, para 1.2.1). As a result, there have been very few cases dealt with by the courts (European Parliament 2010, para 1.2.1). Although the scope of these misleading and deceptive practices is difficult to assess, they do appear to be widespread (Lim et al. 2010, p. 940). The prevalence of fake reviews leads to the very real risk of eroding consumer confidence in the online marketplace. The market is growing at an exponential rate, and its fair and efficient operation is, or ought to be, a matter of serious regulatory concern and attention.

One of the risks of not dealing with the problem is the development of a “lemons market.” In a seminal article, George Akerlof showed that a lemons market can arise where information asymmetries exist leading to buyers discounting the price they are prepared to pay for a product because of the perceived (or actual) risk of buying a “lemon” (a defective or inferior product) (Akerlof 1970). If buyers are only willing to pay a discounted price, it can drive out quality products from the marketplace, which further drives down prices and quality, potentially leading to a downward spiral into a “lemons marketplace.” This results in adverse selection, leading to sub-optimal market conditions in which there is a misallocation of economic resources.

Adverse selection can be illustrated as follows. Assume that sellers have privileged information about their products. If a particular type of product (say, a toaster) is sold at the same price by all manufacturers and retailers, producing and selling low-quality toasters is more profitable than producing and selling high-quality toasters. In this setting, sellers would be able to present low-quality toasters as high-quality toasters, and buyers would have little or no information about the trustworthiness of the seller (Izquierdo and Izquierdo 2007, p. 858). This circumstance leads to adverse selection, where sellers offer items that are less favourable to buyers. It is as if the market selects adverse items for uninformed consumers (Izquierdo and Izquierdo 2007, p. 859). In an extreme case of no information sharing and no high-quality variability, a market can be completely destroyed (Izquierdo and Izquierdo 2007, p. 865).

Information asymmetry between buyers and sellers can undermine buyer confidence in the market. And consumer confidence is linked to the nature and quality of consumer knowledge about the products on offer and the sellers of the products.

The Internet offers an information-rich environment. This would appear to provide a means to overcome information asymmetry, for instance by enabling consumers to share quality information through social networks so that buyers not only learn from their own past experience but also from the experiences of other consumers (Izquierdo and Izquierdo 2007, p. 859). This could reduce uncertainty about products and reduce perceived purchase risks (Kwon and Sung 2012, p. 211). Indeed, there is evidence to suggest that to a degree this is the case as a diverse pool of product reviews is generally associated with higher sales of reviewed products (Kwon and Sung 2012, p. 211). In addition, the focus group participants spoke favourably about the value they attach to reviews, suggesting that this made them more inclined to purchase online. Paradoxically, the Internet’s capacity to enable the ready means for anyone to provide product information, or to gain access to considerable amounts of information about products and their sellers, not only produces conditions that enable the reduction information asymmetry but also produces the conditions that exacerbate it. The Internet provides a convenient and low-cost means for anyone to provide reliable and useful information and just as readily provides the capacity for anyone to provide confusing, conflicting, misleading, inaccurate, or false information.

If the general quality of review information deteriorates, or consumers lose confidence in its veracity, there is a real risk of them placing little or no reliance on the information. A substantial loss of confidence can arise even if fake reviews represent a relatively minor proportion of reviews overall. Tushnet provides the following illustration of this effect. Assume that an online site enables product reviews and that one in every 10 reviews is a fake. If consumers knew that there were fake reviews, but did know which ones were fake, they would likely overly discount all reviews, thereby discounting many genuine reviews (Tushnet 2011, fn 16).

It can be seen, therefore, that loss of consumer confidence in a prime mechanism for overcoming information asymmetries undermines the economic efficiency of the online market and leads to a misallocation of resources. It can also reduce competition within the market as consumers may only trust sellers with a large presence and an established reputation, such as Amazon. As a consequence, fake reviews should be taken seriously.

Regulation of the Online Consumer Marketplace

Regulators face significant challenges because of the difficulties involved in detecting fake reviews and bringing enforcement action to bear. Regulatory resources are probably best spent on dealing with firms that are engaged in promoting fake reviews or take no meaningful action to curb the practice on their sites, rather than dealing with individuals who engage in the practice at the encouragement of the firms. Sole reliance by legislators and regulators on a command and control approach to the problem will doubtless prove inadequate. This approach involves the legislature proscribing certain behaviour, regulators policing compliance, and courts imposing sanctions for breach. Using this system solely to regulate firms more generally has proven particularly problematic because of difficulties in pinning guilt upon particular individuals for organizational breaches, which often involve many people within the firm and whose culpability can vary considerably. Firms also have the capacity to close ranks, rendering obtaining evidence problematic. In any event, firm behaviour is often driven not by regulatory pressure but by the culture prevailing in the sector or by the far more pressing forces of competition (Baldwin and Black 2008, p. 63). An additional limitation of traditional regulatory systems is that they have problems keeping up with technological changes (Scott 2004b, p. 483).

These challenges to command and control systems invite the adoption of additional, more responsive and reflexive, regulatory strategies. Gunningham and Grabosky, for instance, propose the adoption of “smart regulation,” which involves thinking laterally and taking a more holistic approach than is allowed for under the traditional state sanctioning approach. Smart regulation involves the use of a wide armoury of approaches designed to attain policy objectives such as educative, deterrence-based, responsive, and targeted approaches (Baldwin and Black 2008, p. 63; Gunningham and Grabosky 1998). Measures that might be applied for these approaches include industry codes of conduct, feedback mechanisms and monitoring, enforceable undertakings, corrective advertising, and more generalized standard-setting requirements.

The challenges and responses to traditional regulatory systems have led to what Scott describes as the “post-regulatory state,” in which regulatory governance is no longer seen as being dependent on state law, or at least where state law is not seen as being central (Scott 2004a, p. 147). Here, regulation is seen to be not only about government activities but also about “controls that are linked to the generation and enforcement of social norms and the standard-setting, monitoring, and behavior-modification functions of markets” (Scott 2004b, p. 484). Comprehending the dimensions of the post-regulatory state requires “a shift in our understanding of who controls and who is controlled within regimes” (Scott 2004a, p. 147). In summary, the post-regulatory state recognizes that: (1) the law has limited capacity to exert control, (2) control based on law is marginal to contemporary processes of ordering, and (3) state law is only likely to be effective when linked to other ordering processes (Scott 2004a, p. 151). That is to say “conventional approaches to governmental power, which emphasize its legitimacy and basis in consent, are displaced by greater emphasis on ‘local or capillary power’” (Scott 2004a, p. 154).

At its broadest, then, regulatory control can be seen as the exercise of power to attain socially desirable outcomes—whether that power is exercised in a formal sense by government agencies or in an informal sense by individuals and organizations. Informal power, however, is usually not exercised by an individual or organization with the intention of attaining a particular desired social end. Generally the power will be exercised to gain a personal or organizational benefit. The exercise of personal (regulatory) power will co-incidentally—and unintentionally—in uncoordinated concert with other individuals lead to the attainment of a social benefit. This effect can be illustrated in the following way: Assume a seller sells products with a hidden defect that is known to the seller but not to buyers. Assume also that someone buys the product and discovers the defect after using it. She tells her friends, who then tell their friends, and so on. Spreading the word in this way warns off other potential buyers and causes the seller’s business to suffer. If the mechanism for spreading the word is efficient, it will drive the seller out of business or at least prompt her to sell non-defective products. Here spreading the word operates as an effective informal exercise of “regulatory” power. The original buyer sought only to warn her friends. She saw this as a personal gesture to help a friend, rather than an act designed to attain broader social ends. Nevertheless, in this more idealized example, her personal act also co-incidentally, and unintentionally, assisted with advancing broader social ends.

Regulation, it can be said, is intimately related to power, that is, the power to moderate behaviour to attain social, political, and economic aims. The regulatory power is traditionally seen as solely top-down. However, from the perspective of the post-regulatory state, regulatory power can be seen as operating in both a top-down and a bottom-up, atomized, way. Generally, those exercising formal top-down power do so to attain defined public policy ends, whilst those exercising informal bottom-up regulatory power generally do not do so to attain public policy ends. The exercise of power does not generally flow in one direction (that is from the instigator at the top to those who are required to comply at that bottom) (Black 2002, pp. 165–166). Rather, the power is exercised (and submitted to) in various localities and by various people holding all sorts of formal and informal positions of power (or none at all). These people can be found in prisons, hospitals, schools, shops, and so on. Regulatory power, therefore, has multiple sources and its flows are complex and interactive.

These dispersals and interactions of power do not represent a threat to the exercise of formal regulatory power; rather, it expands its possibilities. It allows for the identification of a greater variety of bases of control than just hierarchy and state law (Scott 2004b, p. 147). In the case of the online consumer market, those bases of control may be found through the exercise of informal regulatory power by firms and consumers. These sources of power may be harnessed in a variety of ways. This article proposes that one of those ways may include adopting what is coined here as an “alliance approach.” This requires identifying sources of atomistic power that can be harnessed to attain desired public policy ends. Once identified, the next step is to identify the ways in which the regulator can act in alliance with the parties exercising those localized sources of power. The alliance will work most effectively if the formal public policy aims for the exercise of regulatory power either align or at least are not in conflict, with the personal aims of those exercising localized power. Further effectiveness can be attained where the formal systems enhance, amplify, or work in concert with localized informal exercises of power. As an example, the public policy aims of reducing fake reviews to build consumer confidence in the market fits with individual consumer aims of avoiding negative purchasing experiences. In both cases, the ultimate desire is for a fair and competitive marketplace.

Mention here of the adoption of an alliance approach is made for both descriptive and normative purposes, descriptive in the sense that agencies to some extent already work with non-formal sources of power (non-formal in the strict sense of power exercised by non-governmental agencies) to attain social, political, and economic ends. The encouragement of industry self-regulatory systems is an example. The proposal that an alliance approach be added to the existing regulatory armoury of regulatory systems is normative in the sense of claiming that an alliance approach can and ought to take things further in the pursuit of public policy goals. This can be done by harnessing the actual and potential “regulatory powers” of “allies,” such as firms and consumers.

The alliance regulatory model as proposed in this article involves

  1. 1.

    Identifying the policy or regulatory objectives being sought

  2. 2.

    Identifying the parties of policy and regulatory interest—these may include the regulatory “beneficiaries,” that is to say, those who would benefit from the effective implementation of the regulations. Some or all of these parties are potential regulatory “allies”

  3. 3.

    Identifying the matters of policy and regulatory concern to the allies. The identification process may involve “hearing” the concerns of the allies

  4. 4.

    Identifying the nature and capacity of any “regulatory power” (broadly conceived) of the allies

  5. 5.

    Considering ways in which the regulator or policy maker can harness or align itself with the exercise of that power to attain desired policy and regulatory outcomes

These steps can be applied for the purposes of dealing with fake reviews. Step 1 is a standard early step in the policy development process. In the case of the online consumer marketplace, a public policy objective might be to improve market fairness and efficiency. As discussed in Part V, an economically efficient marketplace can be advanced by reducing or eliminating information asymmetries. Doing so would enhance consumer trust and confidence in the marketplace, thereby increasing the willingness of consumers to participate in the market. If these conditions are realised and maintained, they will promote economic activity and the efficient allocation of economic resources. From a fairness perspective, the reduction of misleading practices reduces the possibilities of consumers buying unwanted and defective products and services.

Step 2 involves identifying the potential beneficiaries of laws and regulations that undermine fair and efficient market conditions. The laws considered here are those that crack down on fake reviews. The beneficiaries may include the operators of review sites and businesses that are actually or potentially affected by false unfavourable reviews. There may also be businesses that are engaged in the practice of paying for fake reviews because they feel under pressure from their competitors to do so. That is, they would prefer not to engage in the practice, but feel under pressure to do so because their competitors are gaining an unfair advantage. Effectively cracking down on fake reviews would remove that pressure. Other potential beneficiaries are consumers who use the Internet for shopping, or may do so in the future. These beneficiaries can be considered as potential allies for attaining the public policy aims of improving marketplace conditions.

Step 3 involves identifying the matters of policy and regulatory concern to the allies. The discussion above in this article outlines some of the matters that may well be of concern. Legitimate businesses may well be concerned about damage done to their business as a result of false and misleading reviews. They might also be concerned that if consumers lose confidence in reviews and cease to rely upon them, a valuable means for attracting business could be lost. Consumers may be concerned that they are being misled when making decisions about which products to purchase and from which sellers. Consumers might be “heard” through consultation processes and through obtaining and analysing evidence-based research into consumer behaviour and desires.

Step 4 involves identifying the allies’ “regulatory powers.” These powers are to be understood in the broadest sense, that is, as the power to moderate relevant wrongful conduct in some way. Firms may have the power to undertake their own detective work to identify and deal with fake reviews. They might, for example, use online detectives such as kwick.com to discover the practice. If the behaviour is detected, they might consider bringing defamation actions. They might also report their discoveries to media organizations in order to name and shame offenders. In Australia, firms can bring an action under section 18 of the Australian Consumer Law, alleging deceptive and misleading conduct.

Consumers have two significant and interrelated forms of informal regulatory power. They can decide not to purchase products or services from a particular seller. They can also cause reputational harm (fairly or unfairly) to a seller, which may impact upon a seller’s reputation for trustworthiness, reliability, responsiveness, and for selling products of an appropriate quality and reliability (Bar-Isaac 2005; Bolton et al. 2004; Calliess 2007, p. 4; Fehr and Schmidt 1999; Hörner 2002). The Internet can facilitate the power to impact upon reputations through consumer reviews and other forms of online communication. Causing negative reputational impacts is sometimes described as “cybergriping” (Schwartz 2006). The risk of reputational damage can therefore operate as an effective online regulator of firms’ behaviour (Becher and Zarsky 2008). Cracking down on fake reviews therefore can enhance consumer regulatory power to deal with untrustworthy sellers and the sale of defective and unreliable products.

Step 5 involves considering ways the regulator or policy maker can harness or align itself with the exercise of localised regulatory power. A number of suggestions can be made about dealing with fake reviews. Jurisdictions outside Australia might consider enabling competitors to have standing to bring deceptive and misleading conduct actions against a firm, without the requirement that the plaintive establish that it has been actually harmed by the conduct. Other suggested possible strategies include a regulator:

  • Acting in coordination with regulators in various other jurisdictions to require that sites that allow for reviews clearly display a regulator approved traffic light system indicating the extent to which each site has adopted reasonable strategies to detect fake reviews. A red light would signal that reviews on the site are not to be trusted, whilst a green light would signal that the site has taken reasonable measures to detect and remove fake reviews. An amber light would signal that caution should be exercised

  • May seek evidence from users and members of industry when deciding which colour traffic light should be assigned to a particular site

  • May undertake education programmes to inform marketeers and firms about the legality of practices that encourage or allow fake reviews

  • Could provide small monetary or other rewards or acknowledgements for consumers or businesses that spot offenders and report them to regulators

  • Could provide support for private systems for identifying and reporting on sites that facilitate or tolerate fake reviews

Conclusion

The Internet offers the potential to reduce, and (ideally) even eliminate, information asymmetry between buyers and sellers of consumer products and services. This would potentially enhance consumer confidence, increase consumer participation, increase competition, and reduce adverse selection. This would lead to a more efficient allocation of economic resources and increase fairness. One factor that is undermining these potentials is sellers and their marketeers engaging in misleading and deceptive conduct. The creation of fake online consumer identities and fake consumer reviews is conduct designed to deceive and mislead consumers. Although consumers have some ability to detect fake reviews, the practice is becoming increasingly sophisticated. It is a practice that policy makers and regulators need to take seriously, even though cracking down on the practice admittedly is difficult.

This article proposed that an “alliance approach” be added to existing regulatory compliance systems and practices. Although it is unlikely such an approach will solve the problem, it offers a means for better dealing with the problem.