Reputation, Certification, Warranties, and Information as Remedies for Seller-Buyer Information Asymmetries: Lessons from the On-Line Comic Book Market
53 Pages Posted: 21 May 2004
Signaling strategies, which sellers of high quality securities, goods, or services employ to differentiate their products from those of lower quality, include: (1) developing a reputation for high quality, (2) certification by a respected third party, (3) warranties, and (4) information disclosure. These signaling strategies are compared using data from the online auction market for classic comic books. This market has several advantages: (1) the information asymmetry is substantial, (2) good measures of reputation are available, and (3) all four signals are common. Third party certification of a comic's quality sends the strongest signal. On average, certified copies sell for roughly fifty percent more than uncertified comics of the same claimed quality, and the percentage differential is higher at the higher grades. It appears that part of the price differential between certified and uncertified comics is due to risk reduction. Books from sellers with positive reputations sell for more than books from sellers with negative reputations, and books from sellers with established reputations sell for more than those from seller's with fledgling reputations. However, reputation has less impact on the price than certification. There is no evidence that books with warranties sell for more than those without. Apparently, buyers either view these warranties as too costly to enforce or they reason that sellers of truly high quality comics should seek certification. We also explore which signals are substitutes or complements, and how choice among the other three strategies depends on the reputation of the seller and other information available to the buyer.
Keywords: Reputation, certification, warranties, information asymmetry
JEL Classification: D82, D83, D12, D44
Suggested Citation: Suggested Citation