Perceived Risk and Escrow Adoption in Online Consumer-to-Consumer Auction Markets: An Economic Analysis

Abstract

Escrow is an emerging trust service in online consumer-to-consumer auction markets in preventing Internet fraud. This chapter studies the effect of traders’ perceived risk on the adoption of online escrow service (OES). This research establishes decision-making models for both the honest trader and the monopolist OES provider. Perceived risk rate (PRR), a dynamic measure of perceived risk for online traders, is introduced to link the two decision-making models together. A calculative model for PRR is proposed, and the primary outcomes from the computer simulation for PRR measurement are presented. This chapter reveals that OES adoption is positively correlated to the estimated level of traders’ PRR. A higher PRR definitely leads to a higher OES adoption rate and hence reduces the Internet fraud in the auction markets. In addition, an overestimate of PRR leads to higher adoption rate, lower defrauding rate, and higher fraud blocking rate.