Reputation in An Internet Auction Market

Cynthia G. McDonald and V. Carlos Slawson

Economic Inquiry, 2002, vol. 40, issue 4, 633-650

Abstract: We investigate how market participants possessing varying degrees of anonymity reduce asymmetric information costs in an electronic auction market using a quantifiable measure of reputation. The data suggest that purchasers in this self-enforcing market use reputation to price information asymmetries associated with counterparty risks. The results provide direct empirical evidence of an economic incentive for investing in reputation. The continually observable feedback of participants indicates that high seller reputation signals preferred traits, including advertised service accuracy, product description accuracy, delivery efficiency, and posttransaction communication. Despite some imperfections, the reputation measure represents clear differences in expected performance between high-reputation and low-reputation counterparties. Copyright 2002, Oxford University Press.

Date: 2002
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