Auctions on the Internet provide a new source of data on how bidding is influenced by the detailed rules of the auction. Here we study the second-price auctions run by eBay and Amazon, in which a bidder submits a reservation price and has this (maximum) price used to bid for him by proxy. That is, a bidder can submit his reservation price (called a proxy bid) early in the auction and have the resulting bid register as the minimum increment above the previous high bid. As subsequent reservation prices are submitted, the bid rises by the minimum increment until the second-highest submitted reservation price is exceeded. Hence, an early bid with a reservation price higher than any other submitted during the auction will win the auction and pay only the minimum increment

en exceed the monetary stakes invol ved. As a consequence, many el ectronic trading pl atforms, incl uding Amazon.com, Cnet.com, eBay.com, Hal f.com and Yahoo.com, have devel oped el ectronic reputation mechanisms to substitute forl egal enforcement. (Others pl atforms get hel p from onl ine services that col l ect and provide information about business partners.) Whil e onl ine reputation mechanisms vary considerabl y in detail , al l are based on the common understanding that providing information about a trader's past behavior - information from earl ier transactions with other parties - al l ows the market to distinguish between the trustworthy and the fraudul ent. sal e of used books (al ong with other used merchandise) on Amazon.com's site provides a simpl e but il l ustrative exampl e. Amazon does not actual l y sel l used books; rather Amazon acts as a middl eman for independent deal ers, some brick-and-mortar bookstores but al so individual s sel l ing from private col l ect

Electronic reputation or “feedback ” mechanisms aim to mitigate the moral hazard problems associated with exchange among strangers by providing the type of information available in more traditional close-knit groups, where members are frequently involved in one another’s dealings. In this paper, we compare trading in a market with electronic feedback (as implemented by many Internet markets) to a market without, as well as to a market in which the same people interact with one another repeatedly (partners market). We find that, while the feedback mechanism induces quite a substantial improvement in transaction efficiency, it also exhibits a kind of public goods problem in that, unlike the partners market, the benefits of trust and trustworthy behavior go to the whole community and are not completely internalized. We discuss the implications of this perspective for improving these systems.

The intemet facilitates interactive and asynchronous communication among human and artificial agents in large bilateral markets. As a consequence, new institutional structures are emerging in the new economy. I discuss a few core problems associated with the economic design of internet markets and the way they are approached by eBay. com, a popular online auction platform.