Dynamic Games among Traders in the Online Commerce Market

This paper studies dynamic games among traders through the reputation system in the online commerce market. The first part of the paper investigates how institutions and the reputation mechanism help to sustain trust in the online market. Using eBay as an example of online commerce market, we develop game theoretical models of asymmetric information on product quality and show that the reputation system can support trust if all the reputation reports are observable. By changing reporting costs, the reputation system has dierent eect on deterring fraud. As mentioned in the literature on online trust, the lack of incentives to report is one of the main reasons for observing partial reputation reports. In the second part of the paper, we designs a mechanism to solve this problem. We suggest that eBay creates an option for sellers to compensate the buyers’ cost on providing reports. We show that there exists a pooling equilibrium where both good type sellers and bad type sellers will choose this rebate option under certain conditions. The sellers’ types are revealed through those reports. This mechanism also helps to induce bad type sellers to put eort in the model of both moral hazard and adverse selection.