Bridging the Trust Gap in Electronic Markets

Trust that suppliers and buyers will keep their word is a necessary ingredient to a well functioning marketplace. Nowhere is the issue trickier than for electronic markets, where transactions tend to be geographically diffuse and anonymous, putting them out of the reach of the legal safeguards and the long-term relationships that build trust in the brick-and-mortar world. Many online platforms have turned to automated reputation systems as a way of giving traders a heads-up on who they are dealing with. Here we describe a strategic framework for thinking about these systems. We also describe some lab data that provides an initial sense of effectiveness. We find that reputation has substantial positive effect, but not enough to be a close substitute for personal relationships; this is so even though our laboratory test abstracts away from many of the problems reputation systems must confront in the field. The evidence suggests directions for improving automated reputation system performance.