Reputation in auctions: Theory, and evidence from eBay

Analyse & Kritik, 2004

Each day, a countless number of items is sold through online auction sites such as eBay and Ricardo. Though abuse is being reported more and more, transactions seem to be relatively hassle free. A possible explanation for this phenomenon is that the sites' reputation mechanisms prevent opportunistic behavior. To analyze this issue, we first summarize and extend the mechanisms that affect the probability of sale of an item and its price. We then try to replicate the results as found in four recent papers on online auctions. Our analyses reveal that (1) it makes sense to differentiate between 'power sellers' and the less regular users, (2) there are variables that have an effect on sales that are often not controlled for, (3) one should carefully consider how reputation is operationalized, (4) neglecting heteroscedasticity in the data can have serious consequences, and there is some support indicating that effects differ across auction sites.

Review of Economics and Statistics, 2005

On the online auction site eBay, by convention, sellers do not ship goods to winning bidders until after they have received payment, so there is an opportunity for sellers to take advantage of bidders' trust. Realizing this, the designers of eBay created a system that relies on self-enforcement using reputation. Several recent studies have found that bidders give little or no reward to sellers who have better reputations. I show that in fact, sellers are strongly rewarded for the first few reports that they have behaved honestly, but marginal returns to additional reports are severely decreasing.

Electronic Commerce Research, 2010

Many studies have examined how various factors affect prices in online auctions. These studies assume that the relationship between price and the seller's reputation take a variety of functional forms, most frequently linear or linear-log. Others divide the sellers into categories by their reputations, and control for dummy variables indicating the seller's category. Identifying the correct functional form is a critical issue for research on any topic involving online auctions. Studies that assume the wrong functional form run the risk of generating biased and inconsistent estimates of the effect of their variables of interest. In this study, the price-reputation relationship is estimated under each of these functional forms using data from auctions of three different products. The estimated effect of reputation on price is substantially larger when using a categorical specification. The models are then subjected to specification tests which suggest that the categorical model is the most appropriate choice.

Information & Management, 2016

Reputation profiles, based on customer feedback ratings, are important for achieving above average sales prices in online auctions. However, contradictory results in past research suggest that reputation effects may depend on information alternatives to customer feedback that sellers can provide to buyers. By explicitly modeling the competing assumptions of classical and contemporary approaches to buyer decision-making and using hierarchical linear modeling to analyse data from 363 online auctions, we found that sellers may benefit from carefully evaluating what information alternatives they combine with reputation profile to realize higher sales prices. 2016 Elsevier B.V. All rights reserved.

The journal of industrial economics, 2002

With internet commerce, a buyer cannot directly examine the product and so must rely upon the accuracy and reliability of the seller in deciding whether and how much to bid. In this setting, the seller's reputation can become an important factor in the bid. This paper examines the impact of the seller's reputation on the willingness of buyers to bid on items sold via internet auctions, using a 1999 mint condition U.S. $5 gold coin whose average price was $32.73. The empirical results show that the seller's reputation has a positive, statistically signi¢cant, but small impact on the price.

Experimental Economics, 2006

We conducted the first randomized controlled field experiment of an Internet reputation mechanism. A high-reputation, established eBay dealer sold matched pairs of lotsbatches of vintage postcards-under his regular identity and under new seller identities (also operated by him). As predicted, the established identity fared better. The difference in buyers' willingness-to-pay was 8.1% of the selling price. A subsidiary experiment followed the same format, but compared sales by relatively new sellers with and without negative feedback. Surprisingly, one or two negative feedbacks for our new sellers did not affect buyers' willingness-to-pay.

Decision Support Systems, 2006

The rapid growth of the consumer-to-consumer online auction market demands research into its market structure and future trends. We propose that online reputation is becoming an important indicator of online traders' business capacity in the auction market. Based on the data sampled from eBay.com, we find that seller reputation, rather than buyer reputation, is lognormally distributed. Following Gibrat's law and the theory of firm's entry and exit, we further explore the reputation data to study the dynamics of the online market. Implications of the findings are discussed

Decision Support Systems, 2007

This research establishes a dynamic game-theoretic model that interprets the mechanism of reputation feedback systems in online consumer-to-consumer (C2C) auction markets. Based on the model, a numerical study is conducted to reveal the effects of feedback systems on auction markets. The study shows that the existence of feedback systems greatly improves the performance of online C2C auction markets: buyers are more willing to trade and gain more benefit from the transactions; sellers' honest behavior is encouraged, as honest sellers' gains are increased and dishonest sellers' gains are reduced. It also offers practical insights on the design of a feedback system: rewarding an honestly-behaving seller is less effective on promoting market performance than punishing a cheating seller.

We provide theoretical and empirical analysis of a selling mechanism used by an Internet web-site that combines important features of auctions and gambling. This is the first analysis of such a selling mechanism, which provides insights into how the two kinds of behavior might be related in real life. The winner of the object is the bidder with the highest bid not submitted by any other bidder. In the equilibrium of our game theoretical model, each bid made with positive probability yields the same probability of winning. Bidders are more likely to submit higher bids, and the bid distribution does not depend on the value of the object or the highest bid allowed if one controls for the number of bidders. Most of these key theoretical predictions are confirmed by the data.

IEEE/ACM Transactions on Networking

We study the economic interactions among sellers and buyers in online markets. In such markets, buyers have limited information about the product quality, but can observe the sellers' reputations which depend on their past transaction histories and ratings from past buyers. Sellers compete in the same market through pricing, while considering the impact of their heterogeneous reputations. We consider sellers with limited as well as unlimited capacities, which correspond to different practical market scenarios. In the unlimited seller capacity scenario, buyers prefer the seller with the highest reputation-price ratio. If the gap between the highest and second highest seller reputation levels is large enough, then the highest reputation seller dominates the market as a monopoly. If sellers' reputation levels are relatively close to each other, then those sellers with relatively high reputations will survive at the equilibrium, while the remaining relatively low reputation sellers will get zero market share. In the limited seller capacity scenario, we further consider two different cases. If each seller can only serve one buyer, then it is possible for sellers to set their monopoly prices at the equilibrium while all sellers gain positive market shares; if each seller can serve multiple buyers, then it is possible for sellers to set maximum prices at the equilibrium. Simulation results show that the dynamics of reputations and prices in the longerterm interactions will converge to stable states, and the initial buyer ratings of the sellers play the critical role in determining sellers' reputations and prices at the stable state.