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The Dynamics of Seller Reputation: Theory and Evidence from eBay

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  • Cabral, Luís M B
  • Hortaçsu, Ali

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.

Suggested Citation

  • 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.
  • Handle: RePEc:cpr:ceprdp:4345
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    Keywords

    auctions; eBay; moral hazard; quality; reputation;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - 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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