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

Author

Listed:
  • Linqiu Li

    (International Institute of Finance, School of Management, University of Science and Technology of China, Hefei, Anhui 230026, China)

  • Xin Fang

    (Lee Kong Chian School of Business, Singapore Management University, Singapore 178899, Singapore)

  • Yun Fong Lim

    (Lee Kong Chian School of Business, Singapore Management University, Singapore 178899, Singapore)

Abstract

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.

Suggested Citation

  • Linqiu Li & Xin Fang & Yun Fong Lim, 2023. "Asymmetric Information of Product Authenticity on C2C E-Commerce Platforms: How Can Inspection Services Help?," Manufacturing & Service Operations Management, INFORMS, vol. 25(2), pages 631-647, March.
    • Handle: RePEc:inm:ormsom:v:25:y:2023:i:2:p:631-647
    DOI: 10.1287/msom.2023.1186
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    References listed on IDEAS

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