Reputation in an Internet Auction Market

Abstract

We investigate how seller reputation affects bidding activity in an Internet auction market. We find that bidders reward higher reputation sellers with higher prices. Sellers have incentive to invest in reputation despite noise due to the ability of participants to shed reputations using cheap pseudonyms and disincentives to report negative outcomes. The market thrives in spite of unobservable products and relatively high contract enforcement costs. The specific feedback of participants suggests that high seller reputation signals preferred traits including delivery efficiency, product description accuracy, advertised service accuracy, and post-auction communication. Overall, the data provide empirical support suggesting that the reputation measure and accompanying feedback align the interests of buyers with economically motivated sellers.

JEL Classification: D44, L14