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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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Cited by:
  1. Saak, Alexander E., 2013. "Traceability and Reputation in Supply Chains," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149988, Agricultural and Applied Economics Association.
  2. Alessandro Ispano, 2013. "Information Acquisition and the Value of bad News," Working Papers 2013-36, Centre de Recherche en Economie et Statistique.

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