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The Dynamics of Seller Reputation: Theory and Evidence from eBay

Luis Cabral () and Ali Hortacsu

No 10363, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a basic theoretical model of eBay's reputation mechanism, derive a series of implications and empirically test their validity. Our theoretical model features both adverse selection and moral hazard. We show that when a seller receives a negative rating for the first time his reputation decreases and so does his effort level. This implies a decline in sales and price; and an increase in the rate of arrival of subsequent negative feedback. Our model also suggests that sellers with worse records are more likely to exit (and possibly re-enter under a new identity), whereas better sellers have more to gain from buying a reputation' by building up a record of favorable feedback through purchases rather than sales. Our empirical evidence, based on a panel data set of seller feedback histories and cross-sectional data on transaction prices collected from eBay is broadly consistent with all of these predictions. An important conclusion of our results is that eBay's reputation system gives way to strategic responses from both buyers and sellers.

JEL-codes: D44 L15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic
Date: 2004-03
Note: IO
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Published as LUÍS CABRAL & ALI HORTAÇSU, 2010. "THE DYNAMICS OF SELLER REPUTATION: EVIDENCE FROM EBAY," The Journal of Industrial Economics, vol 58(1), pages 54-78.

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