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Reputation and adverse selection: theory and evidence from eBay

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  • Maryam Saeedi

Abstract

How can a marketplace introduce mechanisms to overcome inefficiencies caused by adverse selection? In this article, I use a unique data set that follows eBay sellers to show that reputation is a major determinant of price variations. I develop a model of sellers' dynamic behavior where sellers have heterogeneous qualities unobservable by buyers. Using reputation as a signal of quality, I structurally estimate the model to uncover buyers' utility and sellers' costs and underlying qualities. I show that removing the reputation mechanism increases low‐quality sellers' market share, lowers prices, and consequently reduces sellers' profit by 66% and consumer surplus by 35%.

Suggested Citation

  • Maryam Saeedi, 2019. "Reputation and adverse selection: theory and evidence from eBay," RAND Journal of Economics, RAND Corporation, vol. 50(4), pages 822-853, December.
    • Handle: RePEc:bla:randje:v:50:y:2019:i:4:p:822-853
    DOI: 10.1111/1756-2171.12297
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    Cited by:

    1. Zemin (Zachary) Zhong, 2022. "Chasing Diamonds and Crowns: Consumer Limited Attention and Seller Response," Management Science, INFORMS, vol. 68(6), pages 4380-4397, June.
    2. Alberto Bracci & Jorn Boehnke & Abeer ElBahrawy & Nicola Perra & Alexander Teytelboym & Andrea Baronchelli, 2021. "Macroscopic properties of buyer-seller networks in online marketplaces," Papers 2112.09065, arXiv.org, revised Apr 2022.
    3. Xiang Hui & Meng Liu, 2022. "Quality Certificates Alleviate Consumer Aversion to Sponsored Search Advertising," CESifo Working Paper Series 9886, CESifo.
    4. Ciotti, Fabrizio & Hornuf, Lars & Stenzhorn, Eliza, 2021. "Lock-In Effects in Online Labor Markets," LIDAM Discussion Papers CORE 2021014, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Han, Xintong & Li, Yushen & Wang, Tong, 2023. "Peer recognition, badge policies, and content contribution: An empirical study," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 691-707.
    6. Zhong, Jiatong, 2022. "Reputation of Quality in International Trade: Evidence from Consumer Product Recalls," Working Papers 2022-8, University of Alberta, Department of Economics.
    7. Fei Long & Yunchuan Liu, 2024. "Platform Manipulation in Online Retail Marketplace with Sponsored Advertising," Marketing Science, INFORMS, vol. 43(2), pages 317-345, March.
    8. Yasui, Yuta, 2021. "Controlling Fake Reviews," MPRA Paper 108177, University Library of Munich, Germany.

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