informs ® doi 10.1287/mnsc.1050.0379

Reputation mechanisms harness the bi-directional communication capabilities of the Internet in order to engineer large-scale word-of-mouth networks. Best known so far as a technology for building trust and fostering cooperation in online marketplaces, such as eBay, these mechanisms are poised to have a much wider impact on organizations. This paper surveys our progress in understanding the new possibilities and challenges that these mechanisms represent. It discusses some important dimensions in which Internet-based reputation mechanisms differ from traditional word-of-mouth networks and surveys the most important issues related to their design, evaluation, and use. It provides an overview of relevant work in game theory and economics on the topic of reputation. It discusses how this body of work is being extended and combined with insights from computer science, marketing, and psychology in order to take into consid-eration the special properties of online environments. Finally, it identifies opportunities that this new area presents for information systems research. 1

Abstract. Most online feedback mechanisms rely on voluntary reporting of privately observed outcomes. This introduces the potential for reporting bias, a situation where traders exhibit different propensities to report different outcome types to the system. Unless properly accounted for, reporting bias may severely distort the distribution of public feedback relative to the underlying distribution of private transaction outcomes and, thus, hamper the reliability of feedback mechanisms. This study offers a method that allows users of feedback mechanisms where both partners of a bilateral exchange are allowed to report their satisfaction to “see through ” the distortions introduced by reporting bias and derive unbiased estimates of the underlying distribution of privately observed outcomes. A key aspect of our method lies in extracting information from the number of transactions where one or both trading partners choose to remain silent. We apply our method to a large data set of eBay feedback. Our results confirm the widespread belief that eBay traders are more likely to post feedback when satisfied than when dissatisfied. Furthermore, we provide rigorous evidence for the presence of positive and negative reciprocation among eBay traders. Most importantly, our analysis derives unbiased estimates of the risks that are associated with trading on eBay that, we believe, are more realistic than those suggested by a naïve interpretation of the unusually high (> 99%) levels of positive feedback currently found on that system. 1.

We conducted 80 auctions on eBay. Forty of these auctions were for various popular music CDs while the remaining40auctionswereforvideogames for Microsoft’s Xbox gaming console. The revenue equivalence theorem states that any auction form having the same effective reserve price yields the same expected revenue. The effective reserve price on eBay consists of three components: the opening bid amount, the secret reserve amount, and the shipping and handling charge. We set no secret reserve price and varied the opening bid and the shipping and handling charge to keep the overall reserve level fixed. When the effective reserve was $4, auctions with a low opening bid and high shipping charges attracted more bidders, earlier bidding, and yielded higher revenue than those with a high opening bid and low shipping charges. The same results holds only for Xbox games under the $8 effective reserve. Unlike the other treatments, where the reserve represents less than 30 % of the retail price of the item, for CDs, the $8 effective reserve represents over 50 % of the retail price of the item. In this treatment, we find no systematic difference in the number of bidders attracted to the auction or revenues as a function of how the effective reserve is allocated between opening bid and shipping charges. We show that these results can be accounted for by bounded-rational bidding behavior.

Every new method of trade offers an opportunity for economic agents to compare its costs and benefits relative to the status quo. Such comparison motivates sorting across market segments and reshapes the whole marketplace. The Internet provides an excellent example: it introduces substantial search cost savings over brick and mortar retail stores but imposes new obstacles for sellers to convey quality. Using sportscard trading as a case study, we provide empirical evidence on (1) the sorting of product quality between the online and offline segments, (2) the changes for retail outlets after the Internet came into place, and (3) how supporting industries such as professional grading and card manufacturing adapted to take advantage of the new market.

Vincent Crawford, Mark Duggan and attendants at numerous seminars and conferences. We are particularly grateful to Seth Sanders and John List for their constructive advice at the early stage of the research, and to Timothy Bresnahan, Rachel Kranton and Thomas Hubbard for their detailed suggestions in reshaping earlier versions. Special thanks to 8 friends who acted as our agents in purchasing baseball cards in retail markets, and numerous sports card store owners who shared their insights regarding the sportscard industry. Excellent research assistance from Randy Alexander Moore and Krzysztof Fizyta is gratefully acknowledged. Any remaining errors are ours. Economists accept consumer frauds as an equilibrium outcome of information costs. This paper empirically investigates what information is costly, what contribute to the information costs, and what institutions are more effective in reducing the information costs. We focus on one of the most complained about markets – Internet auctions. In a field experiment, we obtain actual baseball cards from both online and retail markets whose quality are then professionally graded and compared to the prices paid by online buyers for goods with similar claims. The experiment allows us to obtain a key variable- true quality- on top of price and seller ratings used in the existing literature.

conferences. We are particularly grateful to Seth Sanders and John List for their constructive advice at the early stage of the research, to Timothy Bresnahan, Rachel Kranton and Thomas Hubbard for their detailed suggestions in reshaping earlier versions, and to Editor Ariel Pakes and two anonymous referees for their careful readings. Special thanks to 8 friends who acted as our agents in purchasing baseball cards in retail markets, and numerous sports card store owners who shared their insights regarding the sportscard industry. Excellent research assistance from Randy Alexander Moore and Krzysztof Fizyta is This paper examines the link between price, quality, seller claims and seller reputation in Internet auctions. To obtain a precise measure of quality, we purchased actual baseball cards and have them professionally graded. These cards were systematically purchased so half of the sample came from sellers making high quality claims and the other half from sellers making modest or no claim. We compare the quality data to the prices paid by online buyers for goods with similar claims. We find that some buyers in the online ungraded market are misled by non-credible claims of quality. They pay higher prices but do not receive better quality and in fact are defrauded

Despite the fact that more and more people are selling things online, the community of sellers is under-investigated by information systems researchers. This research explores the role of sellers’ trust in the continued use of online marketplaces. This research differentiates between the sellers’ trust in intermediaries and their trust in the community of buyers. In addition, the concept of trust is examined with a balanced view of cognitive and affective trust. A research model is developed. Empirical data collected from sellers at uBid.com confirm the research model and hypotheses. The findings show that, for online sellers, (1) both cognitive and affective components of trust matter; (2) trust in the intermediary impacts trust in the community of buyers through the trust transference mechanism; (3) trust influences sellers ’ retention to online marketplaces indirectly via perceived usefulness and perceived enjoyment of using online marketplaces; and (4) perceived enjoyment is an important antecedent of sellers’ retention. This research has implications for information systems research and practice.

The phenomenon of reputation has been extensively studied in economics, game theory in particular. The game theoretic framework for analysing reputation is that of repeated games in which some players are uncertain about the payoff structures of their opponents. There are two keyterms in this informal definition:

Online trust is growing in importance as a topic of study and its influence on Internet marketing strategies is increasing. “Online trust includes consumer perceptions of how the site would deliver on expectations, how believable the site's information is, and how much confidence the site commands. " (Bart, Yakov, Venkatesh Shankar, Fareena Sultan, and Glen L. Urban [2005], “Are the Drivers and Role of Online Trust the Same for All Web Sites and Consumers? A Large-Scale Exploratory Empirical Study, ” Journal of Marketing, 69(4), 133–152). In this article, we review advances in online trust research based on an overarching framework, outlining the key insights learned so far. These insights include: online trust extends beyond privacy and security, is closely connected to website design, its formation is an ongoing process, and is heterogeneous across individuals and products. We propose several ideas for future research relating to multiple aspects of online research, such as the longitudinal component, multichannel element, global aspect, personalization and cross-disciplinary nature.