Reputation in Online Auctions: The Market for Trust

by Jennifer Brown, John Morgan

Fall 2006

Volume 49
Issue 1

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Online markets have dramatically altered the retail landscape. By eliminating barriers associated with geography as well as the physical costs of maintaining a storefront, online markets have created a “democracy” of buyers and sellers. However, the fluidity of this marketplace and the relative anonymity of transactions has made the problem of maintaining trust critically important. Solving the “trust problem” represents a key competitive advantage for many of the successful players in the online space. For instance, much of the remarkable success of eBay has stemmed from its ability to create valuable and informative reputations for its users through its feedback system. The lock-in associated with a user’s reputation on eBay helped it to stave off challenges by Amazon and Yahoo. This article describes how eBay’s solution to the “trust problem,” has led to the creation of a “market for feedback” whose sole purpose is the “manufacture” of reputation for eBay users. It presents a case study and a statistical analysis of this market in order to show that its maintenance represents a crucial challenge to eBay’s future competitive advantage and, more generally, to solving the “trust problem” in other online markets.

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