2024-18519. Trade Regulation Rule on the Use of Consumer Reviews and Testimonials

Table 1.1—Present Value of Net Benefits

[2024-2033 (in billions)]

	Present value: low-end estimate	Present value: high-end estimate
Total Benefits:
3% Discount Rate	$67.40	$269.55
7% Discount Rate	57.03	230.44
Total One-Time Costs	0.87	0.00
Net Benefits:
3% Discount Rate	66.53	269.55
7% Discount Rate	56.16	230.44

1. Estimated Benefits of the Final Rule

This section describes the beneficial impact of the rule, provides quantitative estimates where possible, and describes benefits that are only assessed qualitatively. The quantifiable estimates reflect benefits stemming from the decrease in online review manipulation on third-party platforms or company websites, which covers most of the prohibitions contained in the rule. This analysis does not calculate benefits from the other aspects of the rule—that is, the prohibitions on fake or false celebrity testimonials, company-controlled entities that deceptively purported to provide independent opinions, review suppression, and the misuse of fake indicators of social media influence—because of the limited quantitative research in these areas. Some of these benefits are likely to be substantial. The quantified benefits are presented by benefit category, rather than stemming from a specific provision of the rule, because the relevant provisions have the same end goal—that is, to improve the information available to consumers by reducing the level of review manipulation. Therefore, it is difficult to disentangle the benefits stemming from each provision.

Existing academic literature in economics, marketing, computer science, and other fields documents the importance of online reviews; specifically that the number of online reviews and aggregate ratings are extremely important for consumer purchase decisions. It is widely documented that the presence of online reviews improves consumer welfare via reductions in both search costs and the level of information asymmetry that exists prior to purchase.^[489]

When making purchase decisions, consumers typically have incomplete information on product quality and attributes. Searching for additional information is costly. Consumers incur costs—including time and effort costs—to seek, evaluate, and integrate incoming information. Online platforms where past users share information about their experiences can significantly lower search costs.

Researchers have also demonstrated that consumer reviews create value for consumers beyond a reduction in search costs. Consumers are better able to learn of a product's quality and attributes when there is free-flowing, non-manipulated commentary from past consumers. Consumer reviews lead to “better” decisions by increasing the level of information available prior to purchase and reducing uncertainty. By the same token, the academic literature also documents that manipulated or fake reviews lead to reductions in consumer welfare by leading consumers to buy low-quality products or otherwise make suboptimal purchase decisions.^[490]

A secondary benefit is deterrence of the specified review practices. The rule is essentially the only means for imposing civil penalties in most cases involving such practices. Civil penalties are not available for conduct that violates section 5(a)'s prohibition on unfair or deceptive acts or practices—rather, a violation of an FTC rule is necessary to impose civil penalties under section 5(m)(1)(a). Civil penalties act as a deterrent to fraud and deception in connection with reviews.^[491]

To obtain redress without alleging a rule violation, the Commission must typically first determine in an administrative proceeding that the respondent violated the FTC Act, successfully defend that determination in any appeal to a Federal court of appeals, and then initiate a second action in Federal district court under section 19(a)(2) in which the Commission must prove that the conduct at issue is “one which a reasonable man would have known under the circumstances was dishonest or fraudulent.” ^[492] Although these requirements are likely to be satisfied in cases involving the conduct covered by

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the rule, it would take substantially more time and resources, and would significantly delay any redress to consumers, compared to a single Federal court action alleging a rule violation, in which the court adjudicates both whether the defendant violated the rule and, if so, the appropriate amount of monetary relief to award.^[493]

Given the prevalence of unfair or deceptive conduct involving reviews and testimonials, the Commission will have no shortage of bad actors to investigate; it can invest the extra resources freed up by the final rule into more investigations and actions with respect to consumer reviews or testimonials. In sum, the potential consumer-redress benefits of the rule are significant: the Commission can put a stop to more inarguably unfair or deceptive consumer reviews, return more money to consumers, and obtain that redress more quickly.

a. Consumer Welfare Benefits From Better-Informed Purchase Decisions

The study containing the most direct estimate of welfare losses from review manipulation finds that the presence of fake reviews leads consumers to lose $0.12 for every dollar spent in an experimental setting.^[494] The study considers a limited number of kinds of review manipulation, which notably does not include suppression of negative reviews or misrepresenting the independence of reviews, which might mean that $0.12 is an underestimate of the effect of the rule. However, the study also measures the effect of complete elimination of inflated star ratings and false written narratives, which might mean that $0.12 is an overestimate of the effect of the rule. Thus, the Commission believes that a reasonable proxy for the effect of the rule's elimination of much review manipulation is that consumers will gain an estimated $0.12 for every dollar spent on goods whose online reviews included fake or false ones.

To estimate consumer welfare benefits from better-informed purchase decisions, the Commission first estimates the total amount of sales for which consumers consult online reviews. U.S. e-commerce sales by retail firms totaled $1.119 trillion in 2023.^[495] The Commission assumes that all online retail sales had some form of user-generated commentary ( e.g., on third-party review platforms or on company websites), and that this commentary factored into consumers' purchase decisions for these goods.

Online reviews are also important for commerce that is not conducted online, including for revenues earned by the hospitality industry and by other services. Sales for businesses classified as “Food Services and Drinking Places” by the U.S. Census totaled $980.15 billion in 2022, which includes revenue from restaurants and bars.^[496] The Commission assumes that consumers rely on reviews for only a portion of these sales. Some consumers—particularly those living in rural parts of the country and in smaller cities—may have a small set of familiar food and drink establishments available to them, making online reviews less influential to their decision to patronize a particular one. Moreover, prior research has found that online reviews do not impact revenues of chain restaurants.^[497] Accordingly, the Commission assumes that consumers rely on reviews for twenty-five percent of the total revenue generated in the food services and drinking places sector (twenty-five percent of $980.15 billion, or $245.04 billion).^[498]

Online reviews are also important for sales in other service sectors. In 2022, total revenue was $316.35 billion for the accommodations sector (which includes hotels and vacation rentals), and total revenue was $67.70 billion for personal services (including beauty salons, barber shops, health clubs, and non-veterinary pet care), totaling $384.05 billion for both sectors.^[499] About half of hotel revenue is generated by business travelers, who might rely less on online reviews than leisure travelers do.^[500] In addition, pre-paid hotel bookings and vacation rentals booked online are already accounted for in the e-commerce sales figure described above. Furthermore, some consumers may be loyal customers of local salons and other personal services, regardless of these businesses' online reputations. For these reasons, the Commission assumes that a subset of accommodation and personal services revenues is affected by consumer reviews. Similar to the calculation for the food and drinking places industry, the Commission assumes that twenty-five percent of total accommodation and personal care services revenue is impacted by consumer reviews (twenty-five percent of $384.05 billion, or $96.01 billion). The total estimated revenue for services impacted by consumer reviews is $341.05 billion (the sum of $245.04 billion and $96.01 billion). Combining the revenue estimates described above yields $1.461 trillion in estimated sales of goods or services for which consumers incorporate reviews into their decision-making.

Quantitative estimates of the incidence of fake or false reviews vary by source.^[501] Nevertheless, at least three prior studies examining the degree of review manipulation as a proportion of businesses or products (rather than as a proportion of reviews) contain similar findings. According to these studies, approximately ten percent of products or businesses have some manipulated ( print page 68072) consumer reviews.^[502] Thus, a basic approximation of total e-commerce sales involving some review manipulation is ten percent of $1.119 trillion, or $111.9 billion. Similarly, a basic approximation of review-dependent service industry sales involving some review manipulation is ten percent of $341.05 billion, or $34.1 billion.

Importantly, online businesses that engage in review manipulation are likely to earn less revenue than other e-commerce companies. For example, prior research has found that independent firms and sellers offering lower-quality products are more likely to engage in review manipulation.^[503] Therefore, e-commerce sales affected by review manipulation are likely to be lower than the $111.9 billion in sales described above. A more conservative estimate of e-commerce sales involving review manipulation can be obtained by using price differentials of review-manipulated products versus others. Because products with online review manipulation have price points that are approximately 19 percent of the average price of goods sold online (according to research using data from Amazon),^[504] a more conservative estimate of review-manipulated products' revenue is 1.9 percent (19 percent × 10 percent) of all $1.119 trillion in e-commerce sales, or $21.26 billion. Because the Commission does not have data on the revenue or quantities sold of review-manipulated products, it assumes that revenue is constant across price points and relies solely on the price differential to approximate revenue. The Commission does not similarly adjust revenues for non-e-commerce firms ( e.g., restaurant and hotels) because there is less variation in prices in those industries.

The Commission estimates annual welfare gains by applying the $0.12 estimate, described above, to the estimated amount of U.S. sales that are likely to have some manipulated consumer reviews, yielding an annual estimate of welfare gains in the range of $6.64 billion (12 percent of $55.36 billion, the sum of $21.26 billion and $34.1 billion) and $17.52 billion (12 percent of $146.0 billion, the sum of $111.9 billion and $34.1 billion). Assuming that e-commerce sales increase linearly over the next ten years at the same rate as they did in the past year,^[505] the present value of consumer welfare improvements from better-informed purchasing decisions is estimated to be between $57.03 and $230.36 billion as described in Table 2.1.

Table 2.1—Estimated Benefits From Consumer Welfare Improvements From Purchase Decisions

[2024-2033]

Percent of e-commerce revenue impacted by review manipulation	Total annual welfare improvements from better-informed purchase decisions (in billions)	Total 10-year (2024-2033) welfare improvement, 3% discount rate (in billions)	Total 10-year (2024-2033) welfare improvement, 7% discount rate (in billions)
10	$17.52	$230.36	$196.91
1.9	6.64	67.40	57.03

b. Consumer Time Savings From Increased Reliability of Summary Ratings

The rule's prohibitions against deceptive and unfair consumer review acts and practices would increase the reliability of consumer reviews. The Commission assumes that this improvement in the dependability of reviews will lead consumers to place more trust in aggregate measures ( e.g., aggregate star ratings), which many review settings use to summarize consumer reviews. This in turn will lead some consumers to spend less time scrutinizing individual reviews to detect red flags commonly found in manipulated reviews ( e.g., spelling and grammar mistakes, generic highly positive or negative statements, and lack of detail). Therefore, the rule is likely to result in some amount of time savings for consumers who consult online reviews before making purchases.

Approximately eighty percent of Americans are online shoppers.^[506] Of those who shop online, fourteen percent shop online more than once a week, twenty percent shop online once a week, twenty-three percent shop online once every two weeks, twenty-five percent shop online once a month, and the remainder do so every few months.^[507] Different age groups of online shoppers spend various amounts of time reading reviews before making a purchase decision. On average, younger consumers spend more time reading reviews than older consumers.^[508] This analysis does not incorporate time spent by consumers researching reviews of ( print page 68073) restaurants, hotels, and other goods and services that are not purchased online because of the limited amount of information available regarding consumers' total time spent on such activities.

According to the Bureau of Labor Statistics, the average hourly wage in 2023 was $31.48.^[509] Recent research suggests that individuals living in the United States value their non-work time at eighty-two percent of average hourly earnings.^[510] Thus, Americans overall value their non-work time at $25.81 per hour on average.

The survey data does not specify whether consumers were surveyed regarding the time spent reading reviews before the purchase of a single product or whether the question concerned the purchase of multiple products. This analysis assumes that the time listed in the survey results pertains to the purchase of a single product. It also assumes that the implementation of the rule will reduce the time spent reading reviews by ten percent. Combining the above figures results in $2.49 billion in consumer time savings per year, or a present value of $33.53 billion to $39.19 billion over a 10-year period, as described in Table 2.2.

In addition, there are likely to be other utility-related benefits consumers receive when reading nonmanipulated online reviews or consulting more accurate aggregate summary measures, such as increased satisfaction (apart from purchasing decisions) and decreased frustration. The Commission is not able to quantify these benefits.

Finally, some consumers may spend more time reading reviews if reviews are less likely to be fake or otherwise manipulated. This increase in time spent reading reviews may offset any time savings from the increased reliability of summary ratings. Therefore, the Commission presents another scenario in Table 2.2 where consumers do not gain any benefits from time savings. However, as before, there are likely to be additional benefits that are difficult to quantify ( e.g., decreased frustration) that result from reading more accurate reviews, likely yielding positive net benefits related to reading reviews even when consumers spend more time doing so.

Table 2.2—Estimated Benefits From Time Savings

[2024-2033]

Scenario 1—Improved Reliability of Aggregate Measures Reduces Overall Time Spent Reading Reviews
Number of online shoppers, age 18-34 a	60,467,204
Average amount of time spent reading online reviews before making a purchase decision (in hours), age 18-34	0.336
Number of online shoppers, age 35-54 a	67,273,832
Average amount of time spent reading online reviews before making a purchase decision (in hours), age 35-54	0.231
Number of online shoppers, age 55+ a	78,920,814
Average amount of time spent reading online reviews before making a purchase decision (in hours), age 55+	0.167
Total amount of time all online shoppers spend reading online reviews before making a purchase decision (in hours)	48,991,116
Total amount of time U.S. online shoppers spend reading online reviews per year (in hours) b	1,728,406,578
Value of time for online shoppers (per hour)	$25.81
Percentage of time saved	10%
Total annual time savings	$4,461,017,378
Total 10-year (2024-2033) time savings, 3% discount rate (in billions)	$39.19
Total 10-year (2024-2033) time savings, 7% discount rate (in billions)	$33.53
Scenario 2—Increase in Time Spent Reading Reviews Offsets Time Savings from Improved Reliability of Summary Measures
No quantifiable benefit	$0
a  80% of age-specific total U.S. population (Source: Pew Research Center, U.S. Census).
b  Adjusting for online shopping frequency (Source: International Post Corporation).

c. Benefits Related to Competition

Accurate online reviews have been shown to improve competition. Several studies have found that online reviews are particularly important for independent and newer firms.^[511] Ratings are more influential for these firms because consumers do not have strong prior beliefs as to their quality. New entrants whose sales benefit from online reviews typically offer higher quality goods and services. On the other hand, lower-quality firms often experience revenue losses with more online review activity.^[512]

Relatedly, fake, false, and manipulated online reviews allow companies to surpass competitors. One study found that it only takes 50 fake reviews for a seller to pass any of its competitors in terms of visibility ( e.g., via rankings or search results).^[513] It follows that by curbing the number of fake, false, or manipulated reviews, the rule would benefit consumers by improving the competitive environment for legitimate firms selling higher-quality products ( i.e., those who do not rely on review manipulation to sell their goods). While the benefits resulting ( print page 68074) from improvements in the competitive environment are difficult to quantify, the Commission believes they are likely to be substantial.

2. Estimated Costs of the Final Rule

This section describes the costs associated with the rule, provides quantitative estimates where possible, and describes costs that are only assessed qualitatively. While the Commission only quantifies benefits from reduced review manipulation and not the other rule provisions above, the Commission quantifies compliance costs for all aspects of the rule.

a. Compliance Costs

The acts and practices prohibited by the rule are unfair or deceptive under section 5 of the FTC Act. The rule targets acts or practices that are clear violations of section 5, and businesses that are already compliant will not experience any additional compliance costs as a result of the rule. Moreover, the FTC routinely provides guidance to businesses on complying with FTC law, which will make the implications of the rule easy to understand for a wide range of businesses. Finally, in response to the comments, the Commission has both narrowed and clarified the rule requirements relative to the proposed rule ( see section IV of this document). Accordingly, one of the scenarios reflected in Table 3.1 assumes that businesses will spend a de minimis amount of time interpreting the rule and make no changes to their current policies.

However, because businesses now face the potential for civil penalties if they engage in conduct that violates the final rule, businesses may choose to incur additional administrative burdens to ensure compliance. The Commission presents another scenario in Table 3.1 where businesses notify their employees of the rule, conduct a review of their processes, and take any steps they deem important to ensure compliance. For firms that already comply with section 5 of the FTC Act, these steps might be out of caution so as not to risk the possibility of violating the rule. For example, some sellers may currently flag and remove reviews on their websites that they reasonably believe are fake. While this practice would not amount to a violation of the relevant rule provision (§ 465.7(b)), the rule may lead some businesses to choose to take extra steps to verify the inauthenticity of such reviews before suppressing them. A business may also decide to notify its employees of the rule. For example, if certain employees are responsible for posting new product pages or managing the company's social media presence, business owners may wish to notify these employees to ensure compliance. Although cautious firms may elect to conduct additional compliance review, the rule would not require any additional recordkeeping or notices beyond what is required by section 5 of the FTC Act.

For the heightened compliance review scenario in Table 3.1, the Commission makes assumptions about the number of businesses impacted and the number of person-hours involved in compliance activities. In 2021, there were approximately 34.77 million total firms in the United States. Of these firms, 19,688 had 500 or more employees (“large companies”), and the remaining 34.75 million had fewer than 500 employees (“small companies”).^[514] The Commission assumes that all 19,688 large companies had some form of online consumer review presence ( e.g., on third-party business platforms such as Yelp or Google Reviews, or on their own websites). It assumes that 74 percent of the 34.75 million small companies (25.71 million companies) had an online consumer review presence.^[515]

With heightened compliance review, the Commission assumes that lawyers at large companies, whose time is valued at $70.08 per hour,^[516] will spend eight hours conducting a one-time review of the rule and notifying employees whose role involves creating new product pages, managing the company's social media presence, and any other relevant practices covered by the rule. It assumes that small company owners, whose time is valued at $33.48,^[517] and are less likely have formal compliance programs, spend one hour doing the same.

In addition, some companies may spend time reviewing their automated processes to ensure that they comply with the rule. These costs, which companies might incur just once or on a recurring basis, are likely to be minimal. The Commission does not quantify these process-related costs because, among other things, the Commission does not know the number of firms that might undertake such a review.

The total estimated costs are tabulated in Table 3.1.

Table 3.1—Estimated Compliance Costs

	2024 Only
Scenario 1—No Review
No cost	$0
Total cost	$0
Scenario 2—Heightened Compliance Review
Number of large companies (in thousands)	19.69
Cost per hour of rule review and related activities	$70.08
Number of hours of rule review and related activities	8
Subtotal (in millions)	$11.04
Number of small companies with online reviews (in thousands)	25,715.23
Cost per hour of rule review and related activities	$33.48
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Number of hours of rule review and related activities	1
Subtotal (in millions)	$860.95
Total cost (in millions)	$871.98