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The Dynamics of Seller Reputation: Theory and Evidence from eBay

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Author Info
Cabral, Luís M B
Hortaçsu, Ali

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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 sale 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 favourable feedback through purchases rather than sales. Our empirical evidence, based on a panel dataset of seller feedback histories and cross-sectional data on transaction prices collected from eBay, is broadly consistent will 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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4345.

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Date of creation: Apr 2004
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Handle: RePEc:cpr:ceprdp:4345

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Related research
Keywords: auctions; eBay; moral hazard; quality; reputation;

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Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Klein, Tobias & Lambertz, Christian & Spagnolo, Giancarlo & Stahl, Konrad O., 2006. "Last Minute Feedback," CEPR Discussion Papers 5693, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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    • Tobias J. Klein & Christian Lambertz & Giancarlo Spagnolo & Konrad O. Stahl, 2005. "Last Minute Feedback," Discussion Papers 62, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich, revised Mar 2006. [Downloadable!]
  2. David Masclet (CREM - CNRS) & Thierry Pénard (CREM – CNRS), 2006. "Pourquoi évaluer son partenaire lors d’une transaction à la eBay ? une approche expérimentale," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 200620, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS. [Downloadable!]
  3. W. Bentley MacLeod, 2006. "Reputations, relationships and the enforcement of incomplete contracts," Discussion Papers 0506-23, Columbia University, Department of Economics. [Downloadable!]
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  4. Paul Resnick & Richard Zeckhauser & John Swanson & Kate Lockwood, 2006. "The value of reputation on eBay: A controlled experiment," Experimental Economics, Springer, vol. 9(2), pages 79-101, June. [Downloadable!] (restricted)
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  5. Anindya Ghose, 2005. "Used Good Trade Patterns: A Cross-Country Comparison of Electronic Secondary Markets," Working Papers 05-19, NET Institute, revised Oct 2005. [Downloadable!]
  6. Heski Bar-Isaac & Juanjo Ganuza, 2005. "Teaching to the top and searching for superstars," Working Papers 05-06, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
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