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Seller Reputation and Trust in Pre-Trade Communication

  • Bruno Jullien
  • In-Uck Park

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. Heski Bar-Isaac, 2003. "Reputation and Survival: Learning in a Dynamic Signalling Model," Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 231-251, 04.
  2. Mailath, George J & Samuelson, Larry, 2001. "Who Wants a Good Reputation?," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 415-41, April.
  3. Mailath, George J. & Samuelson, Larry, 2006. "Repeated Games and Reputations: Long-Run Relationships," OUP Catalogue, Oxford University Press, number 9780195300796, March.
  4. Benabou, R. & Laroque, G., 1989. "Using Privileged Information To Manipulate Markets: Insiders, Gurus, And Credibility," Working papers 513, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Steve Tadelis, 1997. "What's in a Name? Reputation as a Tradeable Asset," Working Papers 97033, Stanford University, Department of Economics.
  6. Guillermo Ordonez & Andrew Atkeson, 2009. "Optimal Regulation in the Presence of Reputation Concerns," 2009 Meeting Papers 830, Society for Economic Dynamics.
  7. 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.
  8. Ottaviani, Marco & Sorensen, Peter, 2001. "Information aggregation in debate: who should speak first?," Journal of Public Economics, Elsevier, vol. 81(3), pages 393-421, September.
  9. Drew Fudenberg & David K. Levine, 1995. "Reputation and Equilibrium Selection in Games with a Patient Player," Levine's Working Paper Archive 103, David K. Levine.
  10. Chrysanthos Dellarocas, 2003. "The Digitization of Word of Mouth: Promise and Challenges of Online Feedback Mechanisms," Management Science, INFORMS, vol. 49(10), pages 1407-1424, October.
  11. Milgrom, Paul & Roberts, John, 1982. "Predation, reputation, and entry deterrence," Journal of Economic Theory, Elsevier, vol. 27(2), pages 280-312, August.
  12. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
  13. 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.
  14. Stephen Morris, 1999. "Political Correctness," Cowles Foundation Discussion Papers 1242, Cowles Foundation for Research in Economics, Yale University.
  15. Sobel, Joel, 1985. "A Theory of Credibility," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 557-73, October.
  16. repec:rje:randje:v:37:y:2006:1:p:155-175 is not listed on IDEAS
  17. Cabral, Luís M B & Hortaçsu, Ali, 2004. "The Dynamics of Seller Reputation: Theory and Evidence from eBay," CEPR Discussion Papers 4345, C.E.P.R. Discussion Papers.
  18. Cripps,M.W. & Mailath,G.J. & Samuelson,L., 2002. "Imperfect monitoring and impermanent reputations," Working papers 17, Wisconsin Madison - Social Systems.
  19. Atkeson, Andrew & Hellwig, Christian & Ordoñez, Guillermo, 2014. "Optimal Regulation in the Presence of Reputation Concerns," CEPR Discussion Papers 10080, C.E.P.R. Discussion Papers.
  20. Patrick Bajari & Ali Horta�su, 2004. "Economic Insights from Internet Auctions," Journal of Economic Literature, American Economic Association, vol. 42(2), pages 457-486, June.
  21. 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.
  22. 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, vol. 56(5), pages 657-674, July.
  23. Jeffrey C. Ely & Juuso Valimaki, 2002. "Bad Reputation," Discussion Papers 1348, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  24. Dellarocas, Chrysanthos, 2003. "The Digitization of Word-of-mouth: Promise and Challenges of Online Feedback Mechanisms," Working papers 4296-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  25. Melnik, Mikhail I & Alm, James, 2002. "Does a Seller's Ecommerce Reputation Matter? Evidence from eBay Auctions," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 337-49, September.
  26. Andrew McLennan & In-Uck Park, 2003. "The Market for Liars: Reputation and Auditor Honesty," ISER Discussion Paper 0587, Institute of Social and Economic Research, Osaka University.
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