Smeal College Faculty Suggest Improvements To Online Reputation Measurement

UNIVERSITY PARK, PA (August 31, 2004)—The feedback systems used by online retailers to gauge the reputations of sellers provide fewer incentives to trust or be trustworthy according to research co-authored by Gary Bolton and Elena Katok of Penn State’s Smeal College of Business, along with Axel Ockenfels of the University of Cologne.

Forthcoming in the journal Management Science , the paper titled “How Effective are Electronic Reputation Mechanisms: An Experimental Investigation” offers evidence that the popular feedback mechanisms like those used by Amazon, eBay, Yahoo, and other companies do more to benefit entire communities of buyers and sellers rather than individuals. In turn, this may induce less individual trust or trustworthiness. Bolton, Katok, and Ockenfels suggest some enhancements to improve the efficiency and usefulness of feedback systems in the future.

To reach their conclusions, the authors compared the behavior of three distinct types of markets – the “strangers market,” where individual buyers and sellers meet no more than once and the buyer has no information about the seller’s transaction history; the “feedback market,” where an online feedback system tracks seller histories of shipping and provides this information to prospective buyers; and the traditional “partners market,” where the same buyer-seller pairs interact repeatedly.

“Traditional markets rely more on direct reciprocity: ‘I trust you because you were trustworthy with me before.’ Online markets rely more on indirect reciprocity: ‘I trust you because you were trustworthy with others before,’” the authors write. “In both cases, information about reputation enforces trust by inducing a reciprocal response: past trustworthiness is a prerequisite to future business.”

Suggested enhancements to feedback systems recommended by the paper include:

• Informing market participants about the shipping probability in the entire market, and not only about the trustworthiness of individual traders. As the study shows, a buyer whose trust has been betrayed tends to have diminished trust in all sellers regardless of reputation. Information indicating positive overall trust in the market might mitigate the negative effects of a trader’s own bad experience.
• Attempting to gain control over the identities of sellers. In many online markets, participants can change their identities freely, making it easier to escape the stigma of a bad reputation. This practice lessens trust across the entire market.
• Informing buyers of the entire distribution of sellers’ reputational history, rather than relying on a cumulative measure of trustworthiness, which serves to hide information critical to the buyers’ decision to trust.

About the Authors
Gary E. Bolton is professor of business economics at Smeal, Elena Katok is associate professor of supply chain and information systems at Smeal, and Axel Ockenfels is professor in the Economics Department at the University of Cologne.