Cycles in Online Reputations

Abstract:     
We build a model of reputation featuring a long-lived player (e.g. an online seller) and an infinite sequence of short-lived players (e.g. online buyers) which is consistent with three crucial idiosyncrasies of online reputation systems. First, players observe history of past actions upon condition that former short-lived players did not play the Nash convention and decided to trust the long-lived player in previous plays of the game. Second, a short-lived player's trusting action depends on the long-lived player's history of past actions and increases proportionally in the observation of high effort actions. Third, short-lived players may have partial knowledge about the entire history of the game to date given that the reputation system only makes publicly available a fixed and finite number of past actions. We show that this approach can explain the existence of cycles in reputations and we identify how the different parameters of the stage game can limit (or encourage, respectively) deviations from the Stackelberg convention.

Number of Pages in PDF File: 32

Keywords: reputation, rating systems, online reputations mechanisms

JEL Classification: D82, D84

working papers series