Fake online product reviews cost shoppers 12 cents for every dollar they spend, and increase the likelihood they buy inferior products, according to a new working paper to be presented Friday at the NBER Summer Institute.

Why it matters: Intuitively we know fake reviews are bad, but the paper offers a deeper picture of how phony write-ups and inflated star ratings change shopping behavior.

Zoom out: Online markets that bring together large groups of buyers and sellers, with more information on pricing and quality, should theoretically be more transparent and better functioning than brick and mortar markets.

• That's never been quite how it works on the internet. Platforms endlessly battled with fakers and fraudsters to gain user trust. (Just ask Elon Musk about Twitter bots.)

Context: Amazon does try to keep fake reviews off the platform, including by cracking down on Facebook groups where people are offered money or stuff to write them. But smaller sellers, with little brand recognition, have a big incentive to keep trying.

• The pandemic led to a surge in both online shopping and fake reviews — during the 2020 holiday shopping season, about 42% of the reviews on Amazon were fakes, according to one estimate.

How it works: The researchers recruited 10,000 online participants in the U.K. to shop on an Amazon-like platform they'd created. "Shoppers" were asked to pick a product to buy from a group of five identically priced items (either a dash-cam, pair of headphones or a cordless vacuum).

• All of the items were real and rated for quality by a nonprofit consumer advocacy group in the U.K. that sponsored this study.
• Researchers showed some participants fake reviews or inflated star ratings — or both. Others didn't get any phony reviews. A few participants received guidance on how to spot a phony review.
• Those who saw fake written reviews were 7 percentage points more likely to buy faulty products. Inflated star ratings also decreased the likelihood that a shopper would buy a superior product.
• In a separate survey, participants were asked how much money they'd pay for the various items — when fake reviews were in the mix, they were more likely to overpay for products by about 12% on average.

Worth noting: The researchers found that shoppers who use Amazon more frequently were more likely to be affected by phony ratings.

• "That's kind of like the opposite of what most economists think happens in marketplaces," says Robert Metcalfe, an economics professor at the University of Southern California, who co-authored the paper.
• Typically, you think more sophisticated participants would be less likely to be duped — but frequent Amazon users shop the platform faster and tend to trust it more, he says.

What's next: Metcalfe says that online platforms could do more to warn users or guide them on how to spot fake reviews. That would "improve consumer welfare immediately."