Buying Reputation as a Signal of Quality: Evidence from an Online Marketplace

We explore this scope for signaling using Taobao's "reward-for-feedback" mechanism and find that items with rewards generate sales that are nearly 30%higher and are sold by higher quality sellers

Lingfang (Ivy) Li; Steven Tadelis; Xiaolan Zhou

2016

Scholarcy highlights

  • The growth of trade in online marketplaces such as eBay, Amazon Marketplace, Taobao, Etsy, and others in the past two decades is remarkable because buyers are purchasing items that they cannot inspect, but purchasing is from anonymous and far away sellers
  • A challenge to user-generated feedback is that leaving feedback is time consuming, implying that unless buyers enjoy the pro-social aspect of helping other future buyers, feedback is a public good that is most likely under-provided
  • Our analysis suggests that RFF mechanisms can help promote honest and informative feedback, while at the same time offering the added benefit of a signaling mechanism that identifies high quality sellers
  • Te burgeoning growth of online marketplaces, and the increased access to data from them, offers new and exciting opportunities to empirically test how markets work in practice
  • Our empirical evidence suggests that higher quality sellers use RFF to send signals, and that buyers respond to these signals rationally, which in turn alleviates some of the adverse selection problems in anonymous online marketplaces
  • Using the estimates of column 2 we find that offering a rebate is, on average, as effective as reducing price by about 9%; increasing last month’s sales by 389.30%; or increasing the number of positive long ratings in the last month by 705.90%
  • Turning to market design consequences of our study, the results of our analyses suggest that marketplaces can help reduce the asymmetric information problem by letting sellers engage in RFF signaling practices
  • The use of RFF do not create bias in feedback, and they afford the seller the opportunity to build up a good reputation faster, creating a sort of “flywheel.” That is, the signaling content of the RFF encourages both more sales and more feedback, the latter rapidly increasing the seller’s reputation, which in turn attracts more buyers and generates more sales

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