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Lemons on the Web: A Signalling Approach to the Problem of Trust in Internet Commerce




Asymmetric information is at the heart of situations involving trust. In the case of B2C Internet commerce, the information asymmetry typically relates to the difficulty that consumers have of distinguishing between "trustworthy" and "untrustworthy" Web merchants. The impasse can be resolved by the use of signals by trustworthy Web merchants to differentiate themselves from untrustworthy ones. Using an experimental design where subjects are exposed to a series of purchase choices, we investigate three possible signals, an unconditional money-back guarantee, branding, and privacy statement, and test their efficacy. Our empirical results confirm the predictions suggested by signalling theory.

Suggested Citation

  • Lee, Boon-Chye & Ang, Lawrence & Dubelaar, Chris, 2004. "Lemons on the Web: A Signalling Approach to the Problem of Trust in Internet Commerce," Economics Working Papers wp04-10, School of Economics, University of Wollongong, NSW, Australia.
  • Handle: RePEc:uow:depec1:wp04-10

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    References listed on IDEAS

    1. Wiener, Joshua Lyle, 1985. " Are Warranties Accurate Signals of Product Reliability?," Journal of Consumer Research, Oxford University Press, vol. 12(2), pages 245-250, September.
    2. Ippolito, Pauline M, 1990. "Bonding and Nonbonding Signals of Product Quality," The Journal of Business, University of Chicago Press, vol. 63(1), pages 41-60, January.
    3. Price, Lydia J. & Dawar, Niraj, 2002. "The joint effects of brands and warranties in signaling new product quality," Journal of Economic Psychology, Elsevier, vol. 23(2), pages 165-190, April.
    4. Li, Zhan G. & Gery, Nurit, 2000. "E-tailing--For all products?," Business Horizons, Elsevier, vol. 43(6), pages 49-54.
    5. Tülin Erdem & Michael P. Keane, 1996. "Decision-Making Under Uncertainty: Capturing Dynamic Brand Choice Processes in Turbulent Consumer Goods Markets," Marketing Science, INFORMS, vol. 15(1), pages 1-20.
    6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    7. Boulding, William & Kirmani, Amna, 1993. " A Consumer-Side Experimental Examination of Signaling Theory: Do Consumers Perceive Warranties as Signals of Quality?," Journal of Consumer Research, Oxford University Press, vol. 20(1), pages 111-123, June.
    8. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, Oxford University Press, vol. 87(3), pages 355-374.
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    More about this item


    trust (social behaviour); consumer behaviour;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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