Ad-driven Quality Degradation on E-commerce Platforms: A Theory and Empirical Strategy

We develop a formal theory of how paid visibility (advertising and paid ranking) on multi-sided e-commerce platforms can drive a systemic shift toward low-quality and falsely advertised products. Building on information asymmetry, reputation dynamics, and platform revenue incentives, we show mathematically that when platform visibility is sufficiently dominated by paid factors, the marginal return to investments in real quality and long-term reputation falls below the return to investments in short-term promotional signaling or deceptive listings. This produces a tipping threshold: above a critical paid-visibility weight, the market equilibrium is dominated by low-quality or falsely advertised sellers — a quality-reversal equilibrium. We derive conditions for the threshold, characterize comparative statics, and discuss empirical identification strategies (including image-similarity detection, event-study exploitation of platform policy changes, and difference-in-differences designs). The model yields testable predictions and direct policy implications for platform governance and regulation.