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What do we pay for asymmetric information? The evolution of mechanisms in online markets

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  • Chen, Liyun

Abstract

The appearance of the Internet reduces transaction costs greatly, and brings the boom of online markets. While we are trying to regard it as the most realistic approximation of perfect competition market, the asymmetric information and a series of problems caused by it stop us from dreaming. As the old saying goes, there is no free lunch. This summer witnessed the collapse of the reputation system in Taobao, the biggest online transaction website in China. In fact, during the evolution of mechanisms in online markets, reputation, punishment and barriers to entry have been established in turn. What do we pay for maintaining these mechanisms? In which circumstance will they be effective? In this paper I try to build a series of models within the principal-agent frame- work and repeated games to explain why and what we should pay for asymmetric information while enjoying shopping online. Specifically, these mechanisms are considered step by step and their boundary validation conditions are discussed. Finally, as the conclusion indicates, the more range that a mechanism is effective, the more opportunity cost should be paid as a rent for information.

Suggested Citation

  • Chen, Liyun, 2009. "What do we pay for asymmetric information? The evolution of mechanisms in online markets," MPRA Paper 22506, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:22506
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    More about this item

    Keywords

    online market; mechanism design; reputation;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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