Seller Reputation and Trust in Pre-Trade Communication

Abstract

It is shown that if there is adverse selection on seller’s ability in experience goods market, credible communication can be sustained by reputation motives in spite of the inherent conflict of interests between sellers and buyers. In the absence of “commitment” types, reputation motives are explained as a consequence of equilibrium interplay between the market’s perception on a seller’s ability to deliver quality and the level of trust it places on the information he provides. Moreover, reputation motives do not disappear even after the seller’s ability is revealed. This model is applied to examine the extent to which consumer rating systems may discipline sellers in honestly informing buyers about the quality of their product. Also analyzed is the impact of the possibility that sellers may restart as new traders by obtaining new identities.

Keywords: cheap talk, consumer rating system, reputation, trust

JEL Classification: C73, D82, D83, L14