Doing Business with Strangers: Reputation in Online Service Marketplaces
Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS)
University of Pennsylvania - Operations & Information Management Department
June 30, 2013
Online service marketplaces allow service buyers to post their project requests and service providers to bid for them. In order to reduce the transactional risks, marketplaces typically track and publish previous seller performance as a numerical reputation score. By analyzing a detailed transactional dataset with more than 1,800,000 bids corresponding to 270,000 projects posted between 2001 and 2010 in a leading online intermediary for software development services, we empirically study the effects of reputation on market outcomes. We find that buyers trade off reputation and price and are willing to accept higher bids posted by more reputable bidders. We study how various variables moderate the importance of the reputation score: we observe that the reputation score has a smaller effect in situations where there exists a previous relationship between buyer and seller, when the seller has certified his or her skills, when the seller is local, or in situations that prompt higher interpersonal trust. Sellers also respond to changes in their own reputation through three different channels. They increase their bids with their reputation score (price effect), but primarily use a superior reputation to increase their probability of being selected (yield effect) as opposed to increasing their bid prices. Negative shocks in seller reputation are associated to an increase in the probability of seller exit (exit effect), but this effect is moderated by the investment that the seller has made in the site (in the form of skill certifications or detailed user profiles). Furthermore, we analyze the reputational effect of verbal praise left by previous buyers, using text mining techniques to extract sentiment analysis to distinguish between positive and negative comments, and we conclude that the participants in this market are very responsive to this alternative, unstructured reputational information, which behaves in a similar way to the structured numerical reputation score, but provides complementary information.
Number of Pages in PDF File: 37
Keywords: online service markets, online labor markets, reputation, service procurement, procurement auctions
JEL Classification: L86, D82, D83working papers series
Date posted: February 2, 2013 ; Last revised: July 16, 2013
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