Asymmetric Information of Product Authenticity on C2C E-Commerce Platforms: How Can Inspection Services Help?

Problem definition : We consider a customer-to-customer (C2C) platform that provides an inspection service. Uncertain about product authenticity, a seller sells a product through the platform. Before purchasing, a buyer obtains a signal of the product authenticity from the product’s price set by the seller. The platform’s inspection service can detect a counterfeit with a probability. If the product passes the inspection, the platform sends it to the buyer and charges the seller a commission fee. Otherwise, the platform returns it to the seller and charges the seller a penalty fee. Methodology/results : We develop a two-stage game-theoretical model. In the first stage, the platform designs a contract specifying the commission and penalty fees. In the second stage, the seller signals the product authenticity by setting a price and the buyer decides whether to purchase it. This results in a contract design problem that governs a signaling game. We find that the effect of inspection is beyond merely detecting counterfeits. The inspection, even an imperfect one, changes the signaling game’s structure and incentivizes the seller whose product is likely authentic to sell through the platform. This can only be achieved by carefully choosing the commission and penalty fees. Moreover, a larger platform’s expected profit does not imply a larger commission fee or price in equilibrium. Under some mild conditions, the optimal commission increases but the optimal penalty decreases as the platform’s inspection capability improves. Managerial implications : The inspection service is not widely available among leading C2C platforms as it is considered imperfect and costly. Our study suggests that its benefit may be underestimated in practice. Moreover, the inspection can eliminate the seller’s information rent and generate more revenue for the platform. This paper provides guidance on how to set commission and penalty fees when the inspection service is provided.