M-EPLI Talk with Dr. Sofia Ranchordás: “Online Reputation and Information Asymmetries”

By Dr. William Bull and Doris Beganovic (ELS Bachelor student)

 

On the 25th of October 2017, Maastricht European Private Law Institute had the honour of welcoming Dr. Sofia Ranchordás, professor at both Leiden and Groningen Law School, to give a talk about Online Reputation and Information Asymmetries, with an emphasis on providing a critical account of reputational feedback in the platform economy.

At the start of the talk, general concepts pertaining to online reviews as well as problems arising from lack of a legal basis which would sufficiently regulate them were introduced. In today’s world, it has become a common practice to leave an online review after visiting a certain restaurant or after staying at a hotel. Online reviews have gained more importance and value than any existing legal regulations and should therefore be subject to certain regulations and policies. State intervention in this field should be justified by information asymmetries, for various reasons. Online rating and reputational (R&R) mechanisms make more information available to consumers. This information is of substantial importance because it reduces the risks to the public interest and consequently the need for legal regulation. For these reasons, the shift from the regulatory to the information state has occurred. Traditional regulations are not working anymore; licenses are only serving tax interests, so more and more businesses demand to have their own regulations which would either be alternative or complementary to the existing regulations. Even the European Commission has asked local bodies to refrain from imposing regulations because of the protection of public interest. According to the Commission: “For example, rating and reputational systems or other mechanisms to discourage harmful behaviour by market participants may in some cases reduce risks for consumers stemming from information asymmetries.”

Furthermore, the results of empirical research show that 82% of consumers read online reviews, not to mention companies, which rely on them to assess their own performance. The utility of the review depends on a number of factors, such as the perceived identity of a reviewer, the language used, the amount of information available to the public and so on. Inevitably, the online review as a new form of regulation has emerged. These regulations are different to the state-based ones and are considered more valuable because of the greater content they provide and the fact that no expertise is needed. This may seem contradictory to what would reasonably be expected. That is to say, if something stems from a legitimate source, it tends to be perceived as better and more reliable, but in reality, people use other factors such as skin color or language to determine the usefulness of somebody’s review.

On the other hand, online reviews have a few shortcomings. Firstly, there is a lack of transparency as to the selection of information; it is obscure and there is no explanation why we see some reviews first and others afterwards. This unclear processing of data affects reputational integrity, which is very valuable to the businesses. Secondly, online reviews are not products of experts, so their quality can be questionable. They mostly focus on commercial information and are unable to address negative externalities or ‘real standards’, which would protect public interest. Thirdly, building an online system based on a system of reputation creates barriers to entry. In the end only people who have a good reputation will be engaged in a transaction. Fourthly, due process rights such as individuals’ image and privacy are infringed. The impossibility of a person providing a service to react to a negative review and to remove it from the online world may influence the person’s reputation forever.

Lastly, existing legal categories do not fit the use of sharing economy platforms and the new problems they give rise to. The solution would be to make their own set of rules, namely regulations of online reputations. The main problem behind this idea is whether these practices fit within existing legal frameworks that apply to equivalent commercial practices and should play by the same rules, whether these practices should remain to a large extent unregulated, or whether these practices should benefit from less demanding regulations. According to Dr. Ranchordás, the solution should be found in co-regulations. This entails that some form of negotiation involving different state authorities is needed. Online reviews should be a part of a broader network and clearer guidelines on the protection of consumers should be created. Public interest criteria should be an essential aspect of accuracy of online regulation, so that the existence of more information would actually mean more knowledge.

After the talk, one of the points brought up during the discussion concerned the due process issue of an online review. In the offline world you need a sufficiently serious breach in order to terminate an employment relationship so, following this reasoning, what would then be different in the online world where one negative review would be sufficient for a breach of contract and cause the removal of the review? The response focused on the difference of  standards in an online and offline world. While in a regulated world you can discuss the problem, in an online world there is no form which would regulate that or give you a possibility to change it. Another point made regarded the choice of mechanism-regulations. Why is it necessary to regulate online reviews by law, as there are not many comparable situations in the offline world where the public would be at risk for trusting reviews? The answer given was connected to the on-going process of globalization and the importance that online reviews have gained in the platform economy over the past few years. Both consumers and companies have started to rely on them. Therefore, the need for regulated and sufficiently defined criteria is needed to protect the public from risks and ensure that business enterprises run smoothly.