Trust and Reputation in Internet Auctions

Andreas Diekmann, Ben Jann and David Wyder

No 1, ETH Zurich Sociology Working Papers from ETH Zurich, Chair of Sociology

Abstract: Exchange between anonymous actors in Internet auctions corresponds to a one-shot prisoner's dilemma-like situation. Therefore, in any given auction the risk is high that seller and buyer will cheat and, as a consequence, that the market will collapse. However, mutual cooperation can be attained by the simple and very efficient institution of a public rating system. By this system, sellers have incentives to invest in reputation in order to enhance future chances of business. Using data from about 200 auctions of mobile phones we empirically explore the effects of the reputation system. In general, the analysis of nonobtrusive data from auctions may help to gain a deeper understanding of basic social processes of exchange, reputation, trust, and cooperation, and of the impact of institutions on the efficiency of markets. In this study we report empirical estimates of effects of reputation on characteristics of transactions such as the probability of a successful deal, the mode of payment, and the selling price (highest bid). In particular, we try to answer the question whether sellers receive a "premium" for reputation. Our results show that buyers are willing to pay higher prices for reputation in order to diminish the risk of exploitation. On the other hand, sellers protect themselves from cheating buyers by the choice of an appropriate payment mode. Therefore, despite the risk of mutual opportunistic behavior, simple institutional settings lead to cooperation, relatively rare events of fraud, and efficient markets.

Keywords: trust; reputation; auctions; electronic markets; feedback mechanisms; price premiums; information asymmetry (search for similar items in EconPapers)
JEL-codes: C24 D44 D82 L14 L86 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2004-01, Revised 2007-10
New Economics Papers: this item is included in nep-exp and nep-soc
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