Reputation and Uncertainty in Online Markets: An Experimental Study

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Abstract
This paper employs a modified investment game to study how online reputation ratings are assigned, and thus how electronic reputations are formed in transactions where buyers and sellers interact anonymously. Of particular interest are the important questions of how online reputations evolve and how specific reputation information is interpreted by market participants. We vary the level of uncertainty in the transaction environment, and measure the effects of this manipulation on buyers' trust and their subsequent rating behaviors. We distinguish between a reputation mechanism and specific reputation information, finding the former has an association with the overall decision of whether to transact in the marketplace, while the latter shows significance in purchase decisions regarding specific sellers. We also find that aggregate reputation information is weighted differently than singular reputation information. Finally, we show that when reputations are increasingly noisy, buyers are less likely to react negatively to poor ratings and are more likely to give sellers the benefit of the doubt when seemingly uncooperative outcomes occur.

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