Reputation in online auctions: The market for trust

California Management Review

Volumn 49, Issue 1, 2006, Pages 61-81

  Brown, Jennifer ^a   Morgan, John ^b  

^a UNIVERSITY OF CALIFORNIA   (United States)

^b UNIVERSITY OF CALIFORNIA   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 33845506666     PISSN: 00081256     EISSN: None     Source Type: Journal    
DOI: 10.2307/41166371     Document Type: Review

References (34)

1. Nielsen/NetRatings and Harris Interactive, "Nielsen/Netratings Reports the Fastest Growing Web Sites Year-Over-Year Among Top Internet Properties," press release, 2005, available online at 〈www.nielsen- netratings.coin/pr/pr_051220.pdi〉.
2. ACNielsen, "Global Consumer Attitudes Towards Online Shopping," report, 2005, available online at 〈www2.acnielsen.com/reports/documents/ 2005_cc_onlineshopping.pdf〉
3. ebay, "Fourth Quarter and Full Year 2004 Financial Results," press release, 2004, available online at 〈http://investor.ebay.com/ releases.cfm?FYear=2005〉.
4. Adam Cohen disputes the Fez dispenser story in his book The Perfect Store: Inside eBay (Boston, MA: Little, Brown and Company, 2002).
5. Media Metrix. "The Score: March in Review," 2005, available online at 〈www.imediaconnection.com/content/5534.asp〉.
6. Nielsen//NetRatings and Harris Interactive, "Americans Spent A Record 556 Million Dollars in Online Auctions," press release, 2004, available online at 〈www.netratings.com/pr/pr_010628.pdf〉
7. Frederick F. Reichheld and Phil Schefter, "E-Loyalty," Harvard Business Review, 78/4 (July/August 2000): 105-113.
8. Other mechanisms may also help prevent online fraud. Merchants may use address verification and real-time authorization systems, while both buyers and sellers may benefit from using licensed escrow services. In addition, messaging programs such as Skype may help buyers and sellers to build trust through direct communication. That being said, community feedback systems, such as eBay's reputation system, are crucial in fostering both "trust" and site loyalty.
9. We define transaction value to be equal to the total dollar volume of completed transactions in a given category.
10. Ken Belson, "eBay to Buy Skype, Internet Phone Service, for $2.5 Billion," The New York Times, September 13, 2005, section C, p. 13.
11. Katie Hafner, "Seeing Fakes, Angry Traders Confront eBay," The New York Times, January 29. 2006, section I, p. I.
12. Boston Lawyer, Thomas Hemnes, as quoted by Hafner, The New York Times, op. cit.
13. For a glimpse into online dating market growth, see William J. Holstein, "For Some Searches, Google Won't Do," The New York Times. November 6, 2005, p. 9.
14. Jeffrey A. Livingston, "How Valuable Is a Good Reputation? A Sample Selection Model of Internet Auctions," The Review of Economics and Statistics, 87/5 (2005): 453-465.
15. See, for example, Daniel Houser and John Wooders, "Reputation in Auctions: Theory, and Evidence from eBay," University of Arizona Working Paper, 2000, available online at 〈http://econ.arizona.edu/downloads/ working_papers/Internet_Auctions.pdf〉;
16. Kirthi Kalyanam and Shelby McIntyre, "Return on Reputation in Online Auction Markets," Santa Clara University Working Paper, 2001, available online at 〈http://business.scu.edu/faculty/research/working_papers/pdf/ kalyanam_mcintyre_wp10.pdf〉;
17. Cynthia McDonald and V. Carlos Slawson, Jr., "Reputation in an Internet Auction Market," Economic Inquiry, 40/4 (2002): 533-550;
18. Mikhail Melnik and James Alm, "Does a Seller's Reputation Matter? Evidence from eBay Auctions," Journal of Industrial Economics, 50/3 (2002): 337-350;
19. P. Bajari and A. Hortacsu, "Winner's Curse, Reserve Prices, and Endogenous Entry: Empirical Insights from eBay Auctions," Rand Journal of Economics, 34/2 (Summer 2003): 329-355;
20. Sanjeev Dewan and Vernon Hsu, "Adverse Selection in Electronic Markets: Evidence from Online Stamp Auctions," Journal of Industrial Economics, 52/4 (2004): 463-590;
21. Michael Dewally and Louis Ederington, "Reputation, Certification, Warranties, and Information as Remedies for Seller-Buyer Information Asymmetries: Lessons from the Online Comic Book Market," Journal of Business, 79/2 (March 2006): 693-729.
22. Sulin Ba and Paul A. Pavlou, "Evidence of the Effect of Trust Building Technology in Electronic Markets: Price Premiums and Buyer Behavior," MIS Quarterly, 26 (2002): 243-268.
23. Paul Resnick, Richard Zeckhauser, John Swanson, and Kate Lockwood, "The Value of Reputation on eBay: A Controlled Experiment," University of Michigan School of Information Working Paper, 2004, available online at 〈www.si.umich.edu/-presnick/papers/postcards/〉.
24. David Lucking-Reiley, Doug Bryan, Naghi Prasad, and Daniel Reeves, "Pennies from eBay: the Determinants of Price in Online Auctions," University of Arizona Working Paper, 2005, available online at 〈www.u.arizona.edu/~dreiley/papers/PenniesFromEBay.pdf〉.
25. David Eaton, "Valuing Information: Evidence from Guitar Auctions on eBay," Murray State University Working Paper, 2002, available online at 〈http://campus.murraystate.edu/academic/faculty/david.eaton/workpaper0201. pdf〉.
26. Luis Cabral and A. Hortacsu, "The Dynamics of Seller Reputation: Theory and Evidence from eBay," 2006, available online at 〈http://pages.stern.nyu.edu/~lcabral/workingpapers/CabralHortacsu_Mar06. pdf〉.
27. See 〈http://pages.ebay.com/help/policies/feedback-solicitation. html〉 for a detailed descrip-tion of eBay's policy.
28. All user names have been changed. As of June 2005, no eBay user had registered the username thelandseller.
29. "No longer registered" may indicate that the user cancelled their eBay membership or had it suspended by eBay. It seems somewhat unlikely that users cancel their memberships so frequently, since there is no cost to simply abandoning (but not canceling) an unwanted account.
30. eBay allows registered users to search the records of completed auctions from the previous seven-day period.
31. Since approximately 35 percent of the transactions in the data set were conducted in cur-rencies other than U.S. dollars (31 percent of the listings were denoted in UK pounds), we converted all prices to U.S. currency using the exchange rate corresponding to the auction end date, as published by the U.S. Federal Reserve.
32. While successful bidders paid, on average, a total of 54 cents for a single point of feedback, the so-called "law of one price" certainly does not hold in the market for feedback. The "law" states that if a homogeneous product is sold in a competitive market, a single transactions price should prevail. A point of feedback would seem, prima facie, to be a homogeneous product. Furthermore, since each seller can provide a potentially limitless supply of this product, one would expect that the market for feedback would satisfy the classical conditions for the law of one price to hold.
33. See Livingston, op. cit.
34. Dellarocas uses a stylized model of eBay's feedback system to show that the mechanism actually induces maximum efficiency, yet he considers only moral hazard. In this extreme case, buyers have no uncertainty about whether they face a "good" or "bad" seller. Chrysan-thos Dellarocas, "Reputation Mechanism Design in Online Trading Environments with Pure Moral Hazard," Information Systems Research, 16/2 (June 2005): 209-230. However, it is more plausible that eBay's feedback ratings actually provide information about the seller "type." Indeed, the fact that some eBay users are artificially enhancing their feedback scores rein-forces the mechanism's signaling role. Were the ratings only used to sanction uncooperative sellers, then the accumulation of a large number of positive feedback scores would represent an unnecessary expense.