Reputation in Online Auctions: The Market for Trust

Online markets have dramatically altered the retail landscape. By eliminating barriers associated with geography as well as the physical costs of maintaining a storefront, online markets have created a democracy of buyers and sellers. However, the fluidity of this marketplace poses unique challenges owing to the relative anonymity of transactions, the need for trust is paramount. Solving the trust problem represents a key competitive advantage for many of the successful players in the online space. For instance, much of the remarkable success of eBay has stemmed from its ability to create valuable and informative reputations for its users through its feedback system. The lock-in associated with a user's reputation on eBay helped it to stave off challenges by Amazon and Yahoo. We highlight how eBay's solution to the trust problem, has led to the existence of a market for feedback whose sole purpose is the manufacture of reputation for eBay users. We present a case study and statistical analysis of this market and show it as a crucial challenge to eBay's future competitive advantage and, more generally, to solving the trust problem in other online markets.