Abstracts

Dewan, Sanjeev and Hsu, Vernon. Trust in Electronic Markets: Price Discovery in Generalist Versus Specialty Online Auctions. Available online. Jan 2001. [added Mar 05, 01]

Abstract: This paper examines the economic value of trust in electronic markets, based on a comparison of prices across generalist and specialty sites in the arena of person-to-person online auctions. Generally, the two types of sites have very different mechanisms for providing trust in the marketplace – whereas generalist sites do not inspect the merchandise and rely instead on a reputation reporting system, specialty sites typically take possession of auction items and provide a variety of value-added services directed at reducing information asymmetry and other sources of transaction risk. We analyze auction data for collectible stamps from eBay and Michael Rogers, Inc. (MR), a specialty stamps site, using a data set of some 1,600 auction observations from the two sites over January to September 2000. We find that except for the lowest-valued stamps, buyer prices are higher on MR as compared to eBay, and the price difference is greater for higher-valued stamps. On the other hand, seller prices are statistically equivalent across the two sites, except at the low end. This suggests that the market significantly values the trust services provided by MR, and the specialty site is able to capture the surplus through relatively higher transaction fees. As a benchmark for comparison, we study the effectiveness of eBay’s reputation reporting system, finding that seller ratings have a statistically significant effect on auction prices, and more so for relatively riskier transactions, such as high-valued stamps and international transactions. However, the economic significance of seller rating information is modest – on average, 20 additional seller rating points translate into just a 5 cent increase in auction price. Our empirical findings appear to confirm that the observed price differences between eBay and MR are driven primarily by the relative effectiveness of trust mechanisms in the two markets. Put together, our results shed light on the role of trust in electronic markets, and the implications thereof for the evolution of person-to-person online auctions.