Reputation a Boost on eBay

Online marketplaces like eBay may represent a step towards perfect market equilibrium, according to a recent study co-written by a professor at the Kennedy School of Government.

The study—which focused on the popular auction Web site—was authored by Ramsey Professor of Political Economy Richard J. Zeckhauser ’62 and two University of Michigan professors, and suggests that eBay sellers with long-standing, positive reputations can sell more items and charge higher prices.

Online auction-goers searching eBay can bid on items ranging from automobiles to ant farms, and afterwards both buyers and sellers rate each other according to the smoothness of the transaction and the quality of the auctioned goods. The ratings are then made available to future eBay surfers.

While earlier studies found no correlation between an eBay seller’s customer satisfaction rating and their business success, Zeckhauser’s data indicates that online buyers spend about 7.6 percent more on products offered by highly-rated sellers.

These findings, Zeckhauser said, indicate that eBay’s consumer forum fosters a more perfectly competitive system because buyers know more information about the prospective seller, and are thus better equipped to decide from whom to buy.

“To achieve a successful economy, you need information to flow quickly,” he said. “Under eBay’s model, customers get what they pay for and sellers are rewarded for good service.”

According to Zeckhauser, this finding holds potentially profound implications for the future of online commerce. If applied to other online retailers’ Web sites, he said eBay’s consumer feedback model could help buyers sift through the thousands of online sellers to find good-quality, rare items from responsible sellers.

Zeckhauser also said this strategy could eventually be beneficial to non-internet companies. By advertising buyers’ transaction experiences on an internet-based system, “mom and pop” businesses and new companies would have a better chance to compete with more powerful competitors.

However, Zeckhauser said that much work still needs to be done.

“In eBay’s rating system, buyers are too hesitant to give negative ratings,” he said. “Our quantitative study found that negative feedback only occurred 1 percent of the time, but when we spoke to a group of buyers, the percentage of negative eBay experiences was much higher.”

Zeckhauser said his research on eBay remains unfinished. He said his next study will attempt to find out if buyers trust sellers as much as their ratings indicate.