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Seller Reputation and Trust in Pre-Trade Communication

Bruno Jullien () and In-Uck Park

The Centre for Market and Public Organisation from Department of Economics, University of Bristol, UK

Abstract: We characterize the unique equilibrium in which high ability sellers always announce the quality of their items truthfully, in a repeated game model of experienced good markets with adverse selection on a seller's propensity to supply good quality items. In this equilibrium a seller's value function strictly increases in reputation and a seller's type is revealed within finite time. The analysis highlights a new reputation mechanism based on an endogenous complementarity the market places between a seller's honesty in pre-trade communication (trust) and his/her ability to deliver good quality (reputation). As maintaining honesty is less costly for high ability sellers who anticipate less “bad news” to disclose, they can signal their ability by communicating in a more trustworthy manner. Applying this model, we examine the extent to which consumer feedback systems foster trust in online markets, including the possibility that sellers may change identities or exit.

Keywords: cheap talk; consumer rating system; reputation; trust. (search for similar items in EconPapers)
JEL-codes: C73 D82 D83 L14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-gth and nep-mic
Date: 2011-03
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http://www.bristol.ac.uk/cmpo/publications/papers/2011/wp272.pdf (application/pdf)

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Working Paper: Seller Reputation and Trust in Pre-Trade Communication (2009) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bri:cmpowp:11/272

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