Decentralizing Dispute Resolution in Two-Sided Platforms: The Case of Review Blackmail

We study the relative merits of different dispute resolution mechanisms in two-sided platforms, in the context of disputes involving malicious reviews and blackmail. We develop a game-theoretic model of the strategic interactions between a seller firm and a (potentially malicious) consumer. In our model, the seller takes into account the impact of consumer reviews on his future earnings; recognizing this, a malicious consumer may attempt to blackmail the seller by purchasing the product, posting a negative review, and demanding ransom to remove it. Without a dispute resolution mechanism in place, the presence of malicious consumers in the market can lead to a significant decrease in firm profit, especially in settings characterized by high uncertainty about product quality. The introduction of a standard "centralized" dispute resolution mechanism (whereby the firm can report potentially malicious reviews to the host platform, which then judges whether to remove the review) can restore efficiency to some extent, but requires the platform's judgments to be both very quick and highly accurate. We demonstrate that an appropriately-designed "decentralized" mechanism (whereby the firm is allowed to remove reviews without consulting the platform, subject to ex post penalties for wrongdoing) can be much more effective, while simultaneously alleviating — almost entirely — the need for the platform's judgments to be quick. These results suggest that decentralization, when implemented correctly, may be a more efficient approach to dispute resolution.