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How Social Reputation Networks Interact with Competition in Anonymous Online Trading: An Experimental Study

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  • Gary E Bolton
  • Claudia Loebbecke
  • Axel Ockenfels

Abstract

Many Internet markets rely on ‘feedback systems’, essentially social networks of reputation, to facilitate trust and trustworthiness in anonymous transactions. Market competition creates incentives that arguably may enhance or curb the effectiveness of these systems. We investigate how different forms of market competition and social reputation networks interact in a series of laboratory online markets, where sellers face a moral hazard. We find that competition in strangers networks (where market encounters are one-shot) most frequently enhances trust and trustworthiness, and always increases total gains-from-trade. One reason is that information about reputation trumps pricing in the sense that traders usually do not conduct business with someone having a bad reputation not even for a substantial price discount. We also find that a reliable reputation network can largely reduce the advantage of partners networks (where a buyer and a seller can maintain repeated exchange with each other) in promoting trust and trustworthiness if the market is sufficiently competitive. We conclude that, overall, competitive online markets have more effective social reputation networks.

Suggested Citation

  • Gary E Bolton & Claudia Loebbecke & Axel Ockenfels, 2007. "How Social Reputation Networks Interact with Competition in Anonymous Online Trading: An Experimental Study," Working Paper Series in Economics 32, University of Cologne, Department of Economics.
  • Handle: RePEc:kls:series:0032
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    Cited by:

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    2. von Essen, Emma & Karlsson, Jonas Karlsson, 2013. "A matter of transient anonymity: Discrimination by gender and foreignness in online auctions," Research Papers in Economics 2013:6, Stockholm University, Department of Economics.
    3. Fereshteh Ghazizadeh Ehsaei, 2012. "Acceptance of Feedbacks in Reputation Systems: The Role of Online Social Interactions," Information Management and Business Review, AMH International, vol. 4(7), pages 391-401.

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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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