service Skype provides further evidence that the company expects growth in high-value items;
eBay’s chief executive officer, Meg Whitman, claimed that the acquisition will make online
trading easier for eBay users, especially for “big ticket” transactions.
Robustness of the reputation mechanisms is essential for growth of big ticket transactions in
online marketplaces, and eBay in particular. The central dilemma is that the value of a “good
reputation” to a bad seller, which would allow him to imitate a good seller, is considerably
higher in markets for high-value items. Thus, even if a seller ruins his or her reputation after only
a single large transaction, the gains from a successful scam might well be worth the cost of
increasing his or her reputation. Clearly, the cost of “investing” in reputation is key. In this
paper, we will show that the feedback system, which has served eBay so well and is a model for
solving the trust problem in many online marketplaces, is a potential “Achilles heel” in terms of
growth opportunities for high-value items. In particular, we show that the cost of investing in
reputation is relatively small and, through a case study, illustrate how some sellers have already
moved to take advantage of the opportunity.
Abuse of the feedback system is not the only challenge that big ticket items bring to the online
marketplace. Fake high value items are also an increasing problem. Again, without trust, the
presence of fakes threatens to undermine the entire online marketplace for certain types of goods.
For instance, a recent lead article in the New York Times brought attention to the active market
for fake collectible jewelry on eBay.
While eBay claims that only a small fraction of its listings
offer fraudulent goods, some experienced users and legitimate companies such as Tiffany
Jewelry suggest that the sale of counterfeit items is much more pervasive in the market. An eBay
spokesman is quoted saying, “…we don’t have any expertise [in the goods sold on eBay]…
We’re experts at building a marketplace and bringing buyers and sellers together.” The size of
the market and the volume of trade are both evidence of this managerial expertise, yet the
suggestion of widespread fraud may be troubling for eBay. The notion that counterfeit goods are
circulated in anonymous markets is not astounding, but does eBay’s reputation system not serve
to reduce the prevalence of such fraud? Expert legal opinion highlights eBay’s role as an online
powerhouse—if a pending court case proves that eBay facilitates fraud, the decision could affect
not just eBay, but the future of ecommerce in general.
With its powerful online presence and significant contributions to the Internet economy, eBay’s
successes and failures have widespread impact beyond collectibles and cars. While the lessons
drawn here are in the context of eBay, the importance of building reputational systems has broad
applicability, especially in online markets. For example, reputational systems are important in
the battle for competitive advantage among e-retailers and business-to-business auctions, and in
the growing online dating markets.
Before proceeding, it is useful to explain the process by which buyers and sellers obtain
“reputation” on eBay. At the conclusion of each completed transaction on the site, the winning
bidder and the seller have an opportunity to submit “feedback” for each other through the eBay
system. Feedback consists of a rating—positive, neutral, or negative—as well as a brief verbal
description of the quality of the transaction. “Great buyer. Prompt payment.” is an example of
the qualitative feedback submitted after a typical transaction. While numeric ratings and
comments are assigned on a per-transaction basis, feedback summary statistics are tallied by
unique user. The most prominent feedback indicator appears next to users’ identification name
on the site and is the overall user feedback total, calculated as the sum of all feedback points (the
number of unique users awarding positive points minus the number of unique users assigning
negative points to the user). Other users may click on this summary score to view a more detailed
description of the users’ feedback information such as the exact number of positive, negative,
and neutral feedback over several time periods as well as the detailed comments. Importantly,
information about the item from which the feedback was derived is only available for 90 days
following auction close. That is, once the links to past transactions have expired on a users’
feedback page, it is impossible to tell whether a “reputable” seller obtained that reputation by
undertaking many large scale transactions or the same number of trivially-sized transactions.
Obviously, a buyer might draw very different conclusions about the quality of a given seller were
he or she able to assess the source of that seller’s reputation.
2 How Valuable is Seller Reputation?
For eBay’s feedback system to succeed in solving the trust problem, it must be the case that
reputable sellers enjoy price premia and higher probability of making a sale relative to less
reputable sellers. Absent such differences, reputation has no value. Thus, one may naturally ask:
“Are differences in sellers’ feedback ratings indeed reflected in prices or the probability of
sales?” In general, higher positive feedback ratings are weakly correlated with price premia—
there appear to be diminishing returns to feedback levels. In contrast, negative feedback is
strongly correlated with lower transaction prices overall and unsuccessful auction listings.
Lucking-Reiley, Bryan, Prasad, and Reeves
find that positive feedback has no effect on prices
for collectible coins, while negative feedback reduces prices.
Eaton examines electric guitar
sales and finds a similar pattern; positive feedback has no impact, while negative feedback
reduces the probability of a sale for sellers with low (less than 20) feedback points.
Hortacsu conclude that neither positive nor negative feedback affect auction outcomes.
Livingston uses eBay data from 861 auctions of a specific variety of golf clubs to examine the
effects of seller reputation on sales success and auction revenues.
In contrast to the previous
studies, his results suggest that bidders are more likely to bid, and bid higher, when a seller has
positive feedback reports. While returns from increasing from zero to 1 to 25 points is
approximately 3.4 percent in terms of the probability of a sale and 5 percent in terms of auction
revenue, positive reports beyond the first 25 have little impact on how the buyer rewards a
seemingly trustworthy seller. Returns of feedback ratings in the highest quartile are positive
(approximately another 5 percent for probability of sale and revenue), yet the marginal return for
each individual feedback point must be extremely small if a user must accumulate more than 675
feedback points to enjoy this reward.
Several other studies also find that positive feedback had a positive impact on price.
Ba and Pavlou use experiments in the field and find that willingness to pay increased with
sellers’ positive feedback.
They also find that the positive effect increases with item value.
Resnick, Zeckhauser, Swanson and Lockwood organized a series of controlled field experiments
selling postcards on eBay.
Two-hundred matched pairs of postcard lots were auctioned under
different seller identities, varying seller feedback ratings to identify the effect of experience and
reputation rating on sales. Initial seller feedback ratings varied from very high (net rating of
2000, with one negative point) to zero to negative (net rating of -2). Although Resnick
cannot account for the possibility that sales to previous customers were responsible for the
experienced seller’s differential success (
private reputation), their findings do suggest that
buyers are willing to pay approximately 8 percent more for lots sold by the more experienced
seller identity rather than the new venders. Perhaps surprisingly, they also find that negative
feedback has little impact on revenue.
3 A Market for Feedback
Why might one buy a low-quality digital photo of the Golden Gate Bridge for 50 cents, or ten
copies of an identical e-book? What motivates a buyer to pay 10 cents for a compliment
requested from a stranger? Among others, these are important questions that might be asked of
eBay buyers and sellers in a small, but active market for seemingly-valueless items online. The
answer, of course, is “positive feedback”.
Some sellers hide their offers in their text advertisements for emailed compliments (where a
successful bidder may request the exact phrasing of the praise) and digital photographs of
Bigfoot, national landmarks and Eminem. Other sellers offer explicitly to return positive
feedback (and only positive feedback!) to buyers who pay the small listing price. EBay’s search
engine makes the offers easy to retrieve—the term “positive feedback” will reveal hundreds of
listings for low-prices, valueless item designed only to artificially enhance users’ feedback
But is this indeed purely a market for feedback, or are the items being sold on the market
actually otherwise valuable to buyers? We entered the market to investigate. We searched for
“positive feedback”, chose a representative listing, and bought the feedback point. Figure 1 is an
eBay screenshot from the auction. The seller offered a “Positive Feedback E-book” and promised
“Free Positive Feedback” for $0.01 including all shipping fees. Once the one-cent payment was
processed through Paypal, we received a three-page
file (Adobe Portable Document Format)
entitled “100 Feed Back in Only 7 Days” by Dave Robinson. The first page notified readers of
their re-sale rights to the document. The following is an excerpt from the e-book text:
Look on eBay for items that cost next to nothing. You can find the eBay search feature to find
items which cost anywhere from .01 to $1.00. Try this. ... Now bid on 100 items. If you want to
speed things up a bit, try and find auctions with the “Buy It Now” option. If the seller offers
PayPal as a form of payment, go right away and pay for the item. ... If you do this with a hundred
different sellers you should be able to get your feedback score up to 100 in just a few days.
Strong anecdotal evidence suggests that this offer, sale and exchange are typical of the
transactions in the market for feedback. In fact, we purchased five feedback points over several
weeks and received this identical e-book from three different sellers located the US, UK and
It is likely that buyers are already aware of this feedback-enhancing strategy, given their
participation in the auction. The email document provides both parties with evidence, however
thin, that their transaction was not a flagrant violation of eBay guidelines. Yet, for all practical
purposes, the item for sale was no “item” at all, but positive eBay feedback points. Indeed,
absent the potential for increased feedback, posting such a listing on eBay makes no economic
sense for the seller. It costs the seller 25 cents for the insertion fee and an additional 5 cents for
the Buy-It-Now option. By setting a Buy-It-Now price equal to 1 cent with free shipping, the
most the seller can hope to earn from this transaction is a 29 cent loss.
While buyers and sellers actively trade feedback, eBay aims to squelch any such market. eBay
explicitly prohibits the artificial enhancement of any member’s reputation by offering to buy, sell
or barter feedback.
Members who violate the feedback-sale policy may be subject to listing
cancellation and forfeiture of fees, limits or suspension of account privileges, loss of
“PowerSeller” status and feedback removal. A brief, online justification for the policy reminds
users that eBay is founded on trust, and that feedback trade undermines the integrity of the
system. Despite the warning, our investigation reveals that eBay harbors an active and growing
market for user feedback, where buyers and seller coordinate to artificially boost their feedback
Now, suppose a prospective “power seller” were to follow the advice of the feedback-enhancing
e-book. Translating the e-book’s guidance into a selling strategy is straightforward: list items at
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