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Hope or Hype: On the Viability of Escrow Services as Trusted Third Parties in Online Auction Environments

Author

Listed:
  • Xiaorui Hu

    (John Cook School of Business, St. Louis University, St. Louis, Missouri 63108)

  • Zhangxi Lin

    (College of Business Administration, Texas Tech University, Lubbock, Texas 79409)

  • Andrew B. Whinston

    (Red McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712)

  • Han Zhang

    (College of Management, Georgia Institute of Technology, Atlanta, Georgia 30332)

Abstract

Internet fraud has been on the rise in online consumer-to-consumer (C2C) auction markets, posing serious challenges to people's trust in electronic markets. Among various remedies to promote trust and reduce trader's risk, online escrow service has been proposed as a trusted third party to protect online transactions from Internet fraud. However, whether an escrow service constitutes a viable business model for a trusted third party to effectively block Internet fraud remains an open question. This research proposes a dynamic game model for online traders and a profit maximization model for the escrow service provider. Through the investigation of the optimal strategies of online traders, we explore the relationships among traders' decision making, escrow service fee rates, and adoption rates. We reveal the demand for escrow services and establish the optimal pricing rule for the escrow service provider. A numerical study based on the theoretical analysis is conducted to provide detailed guidelines of the model application for an escrow service provider and to explore if the escrow service is a viable business model in C2C auction markets.

Suggested Citation

  • Xiaorui Hu & Zhangxi Lin & Andrew B. Whinston & Han Zhang, 2004. "Hope or Hype: On the Viability of Escrow Services as Trusted Third Parties in Online Auction Environments," Information Systems Research, INFORMS, vol. 15(3), pages 236-249, September.
    • Handle: RePEc:inm:orisre:v:15:y:2004:i:3:p:236-249
    DOI: 10.1287/isre.1040.0027
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    2. Michaela Sprenger & Tobias Mettler & Robert Winter, 2017. "A viability theory for digital businesses: Exploring the evolutionary changes of revenue mechanisms to support managerial decisions," Information Systems Frontiers, Springer, vol. 19(4), pages 899-922, August.
    3. Oghuma, Apollos Patricks & Chang, Younghoon & Libaque-Saenz, Christian Fernando & Park, Myeong-Cheol & Rho, Jae Jeung, 2015. "Benefit-confirmation model for post-adoption behavior of mobile instant messaging applications: A comparative analysis of KakaoTalk and Joyn in Korea," Telecommunications Policy, Elsevier, vol. 39(8), pages 658-677.
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    5. Laraine Balk Hope & Virgil Ian Stanford & Bruce Marsh, 2014. "Peer-to-peer digital commerce: implications and opportunities for the US Postal Service and other posts," Chapters, in: Michael A. Crew & Timothy J. J. Brennan (ed.), The Role of the Postal and Delivery Sector in a Digital Age, chapter 18, pages 240-252, Edward Elgar Publishing.
    6. Verhagen, Tibert & Meents, Selmar, 2007. "A Framework for Developing Semantic Differentials in IS research: Assessing the Meaning of Electronic Marketplace Quality (EMQ)," Serie Research Memoranda 0016, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    7. Meents, S. & Verhagen, T. & Vlaar, P.W.L., 2011. "How sellers can stimulate purchasing in electronic marketplaces: Using information as a risk reduction signal," Serie Research Memoranda 0014, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
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    11. Solimine, Philip & Isaac, R. Mark, 2023. "Reputation and market structure in experimental platforms," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 528-559.
    12. Antwi, Samuel, 2021. "“I just like this e-Retailer†: Understanding online consumers repurchase intention from relationship quality perspective," Journal of Retailing and Consumer Services, Elsevier, vol. 61(C).
    13. Hardy, Robert Augustus & Norgaard, Julia R., 2016. "Reputation in the Internet black market: an empirical and theoretical analysis of the Deep Web," Journal of Institutional Economics, Cambridge University Press, vol. 12(3), pages 515-539, September.
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    15. Susita Asree, PhD & Mohamed Zain, PhD, 2012. "Influence of Learning Technologies on Learning Effectiveness," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 2(3), pages 29-38, June.
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    18. Verhagen, T., 2008. "Investigating the impact of C2C electronic marketplace quality on trust," Serie Research Memoranda 0008, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    19. Zhangxi Lin & Andrew B. Whinston & Shaokun Fan, 2015. "Harnessing Internet finance with innovative cyber credit management," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 1(1), pages 1-24, December.

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