Reputational Mechanisms in Consumer-to-Consumer Online Commerce

Reputational Mechanisms in Consumer-to-Consumer Online Commerce

Mikhail I. Melnik (Kennesaw State University, USA)
DOI: 10.4018/978-1-5225-2255-3.ch247
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Abstract

The emergence of the Internet is similar to the industrial revolution since it fundamentally changed the costs of transmitting information. However, low costs of transmitting information do not address the issue of the quality of information. One area of online commerce where quality of information became a crucial factor to the development and growth of the market place was the consumer-to-consumer commerce. Asymmetry of information emerged as a detrimental threat to the growth and development of consumer-to-consumer commerce and yet the market found an intuitive and creative way of addressing the issue: feedback and rating mechanisms. Perhaps the greatest example of this is the story of success of the largest consumer-to-consumer platform: eBay.
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Background

Asymmetry of Information

Asymmetry of information occurs when the parties involved in a transaction have different access to the relevant for the transaction information. The issue of asymmetry of information has been studied by economists for many decades. In 2001, George Akerlof shared the Nobel Prize in economics with Michael Spence and Joseph Stiglitz for their monumental work in the area of asymmetry of information in economics. His groundbreaking work formulated the problem on the example of used car sales, Akerlof (1970). When selling a used car, the seller knows far more about the car than a perspective buyer, putting the buyer into a position of disadvantage. The asymmetrically distributed information not only puts the party with less information at a disadvantage but also creates a disincentive for that party to participate in the transaction. This latter characteristic can threaten the growth and development of an impacted market.

In online consumer-to-consumer commerce, the issue is magnified by the fact that there are two channels for the emergence of asymmetry of information. First, in most cases, the perspective purchasers may not have any direct way of examining the goods they intend to acquire online. Second, historically, buyers have been required to submit payments prior to the seller delivering the item. This dynamic implies that the buyer has to rely on the seller for the accuracy of the item’s description and compliance with the terms of transaction.

The success of online consumer-to-consumer marketplaces, including one of the largest such platforms – eBay, serves as an excellent and innovative example of addressing the problem of asymmetry of information. Typically, a consumer-to-consumer website merely serves as the platform for its users to sell/purchase various goods and services. This limited role places the burden of compliance with the terms of transaction on the individual participants and therefore presents the possibility of asymmetry of information.

Key Terms in this Chapter

Opening Price: The starting price in an auction.

Willingness to pay: The maximum value the buyer is willing to pay for a given unit of a product.

Reserve Price: The lowest acceptable bid to the seller, also the lowest binding bid.

Asymmetry of Information: Different parties have different access to the relevant information.

Feedback: Comments posted online.

Online Reputational Mechanism: A structured presentation of feedback about a particular user of a website.

English Auction: A rising price auction.

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