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Seller Reputation and Trust in Pre-Trade Communication

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  • Bruno Jullien
  • In-Uck Park

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.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 814577000000000330.

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Date of creation: 06 Oct 2009
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Handle: RePEc:cla:levarc:814577000000000330

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  1. Luís Cabral & Ali Hortacsu, 2004. "The Dynamics of Seller Reputation: Theory and Evidence from eBay," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 04-05, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Sobel, Joel, 1985. "A Theory of Credibility," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(4), pages 557-73, October.
  3. repec:rje:randje:v:37:y:2006:1:p:155-175 is not listed on IDEAS
  4. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(5), pages 657-674, July.
  5. Steve Tadelis, 1997. "What's in a Name? Reputation as a Tradeable Asset," Working Papers, Stanford University, Department of Economics 97033, Stanford University, Department of Economics.
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  8. Andrew McLennan & In-Uck Park, 2003. "The Market for Liars: Reputation and Auditor Honesty," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0587, Institute of Social and Economic Research, Osaka University.
  9. Benabou, Roland & Laroque, Guy, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 921-58, August.
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  11. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
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  13. Cripps,M.W. & Mailath,G.J. & Samuelson,L., 2002. "Imperfect monitoring and impermanent reputations," Working papers, Wisconsin Madison - Social Systems 17, Wisconsin Madison - Social Systems.
  14. Stephen Morris, 2001. "Political Correctness," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(2), pages 231-265, April.
  15. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195300796, October.
  16. Jullien, Bruno & Park, In-Uck, 2009. "New, Like New, or Very Good? Reputation and Credibility," TSE Working Papers, Toulouse School of Economics (TSE) 09-086, Toulouse School of Economics (TSE), revised 29 Jan 2014.
  17. Heski Bar-Isaac, 2003. "Reputation and Survival: Learning in a Dynamic Signalling Model," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 231-251.
  18. Dellarocas, Chrysanthos, 2003. "The Digitization of Word-of-mouth: Promise and Challenges of Online Feedback Mechanisms," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 4296-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  19. Milgrom, Paul & Roberts, John, 1982. "Predation, reputation, and entry deterrence," Journal of Economic Theory, Elsevier, Elsevier, vol. 27(2), pages 280-312, August.
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  21. Melnik, Mikhail I & Alm, James, 2002. "Does a Seller's Ecommerce Reputation Matter? Evidence from eBay Auctions," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 50(3), pages 337-49, September.
  22. In-Uck Park, 2005. "Cheap-Talk Referrals of Differentiated Experts in Repeated Relationships," RAND Journal of Economics, The RAND Corporation, vol. 36(2), pages 391-411, Summer.
  23. Chrysanthos Dellarocas, 2003. "The Digitization of Word of Mouth: Promise and Challenges of Online Feedback Mechanisms," Management Science, INFORMS, INFORMS, vol. 49(10), pages 1407-1424, October.
  24. Ginger Zhe Jin & Andrew Kato, 2006. "Price, quality, and reputation: evidence from an online field experiment," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 983-1005, December.
  25. Jeffrey A. Livingston, 2005. "How Valuable Is a Good Reputation? A Sample Selection Model of Internet Auctions," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 453-465, August.
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Cited by:
  1. Alessandro Ispano, 2013. "Information Acquisition and the Value of bad News," Working Papers, Centre de Recherche en Economie et Statistique 2013-36, Centre de Recherche en Economie et Statistique.
  2. Saak, Alexander E., 2013. "Traceability and Reputation in Supply Chains," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C., Agricultural and Applied Economics Association 149988, Agricultural and Applied Economics Association.

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