This paper examines the link between price, quality, seller claims and seller reputation in Internet auctions. To obtain a precise measure of quality, we purchased actual baseball cards and have them professionally graded. These cards were systematically purchased so half of the sample came from sellers making high quality claims and the other half from sellers making modest or no claim. We compare the quality data to the prices paid by online buyers for goods with similar claims.
We find that some buyers in the online ungraded market are misled by non-credible claims of quality. They pay higher prices but do not receive better quality and in fact are defrauded more often. Online seller reputation is found to be effective for identifying good-faith sellers. But conditional on completed auctions, reputable sellers do not provide better quality. Evidence also suggests that high-claim sellers target less experienced buyers. We attribute these data patterns to misleading signals in the online ungraded market and two loopholes in the eBay rating system, namely universal ratings and costless switching of anonymous identities.
Theorists argue that, if consumers do not observe product quality before purchase, they may use price, advertising, or seller reputation to infer quality. The inference is validated by monotone relationships between these “signals” and true quality. For example, in Nelson (1970), only high quality sellers can afford costly advertising because high quality products are more likely to attract repeat purchases. In a slightly different setting, Klein and Leffler (1981) argued that high price in the company of high quality generates a continual stream of rental income, which motivates sellers to provide high quality in the long run rather than cheat and disappear in the short run. Similarly, Shapiro (1983) suggested that sellers who sold high quality products in the past have an incentive to maintain their reputation, because good reputations are rewarded with high prices and high profits in the future.
An ideal test of the theory is to link true quality with price, advertising and reputation. However, since quality is rarely observable, researchers often document positive correlations between price, advertising and reputation, and conclude that the positive correlation(s) support the theory. Such exercises are particularly popular in the context of Internet auctions, because most auction sites (such as eBay) offer the complete record of transactions plus feedbacks from previous transactions.
Unlike previous studies, we design a field experiment in Internet auctions, obtain a key variable – true quality and conduct a direct comparison between quality, price, seller claims and seller reputation. We focus on baseball cards whose physical qualities have not been professionally certified at time of sale. As detailed in Section 2, quality is one of the most important determinants of card value but the quality of an ungraded baseball card is very difficult to detect online. In fact, the only information available buyers in these auctions is quality claims and descriptions made by sellers in the auction listings.
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