Returns on reputation in retail e-commerce (2009)

ABSTRACT The industrial organization literature suggests that firms invest in reputation to earn price premiums. Data from online auctions has revealed that sellers are able to earn returns on their reputations. This paper examines online retail markets from the same perspective. We study, data from the markets of homogeneous consumer products listed in Pricegrabber.com in May 2008 is analyzed with a hierarchical regression model using OLS and quantile regression. Contrary to online auctions, the results indicate that in general, sellers do not earn returns on reputation in retail e-commerce. However, the evidence suggests that very large sellers and small sellers may benefit from their reputations in competition. Moreover, we discover that while an increase in the number of sellers lowers prices overall, the control groups are not affected by this but an increase in the number of small sellers lowers prices universally. Keywords: retailing, e-commerce, competition, reputation effects, asymmetric information (ProQuest: ... denotes formulae omitted.) 1. Introduction The Internet gives consumers unprecedented power in purchase decisions. Since the cost of search is minimal on the Internet, buyers can easily compare prices across several vendors before purchase. While price information is more accessible on the Internet, consumers face information-related risks in e-commerce. In e-commerce transactions, buyers disclose sensitive information, such as credit card details, to a seller. Furthermore, it is not possible to verify the quality of merchandise or the identity of a seller, because the merchandise is delivered after the seller has received a payment. Facing these problems of asymmetric information, buyers may need assurance that sellers do not cheat them. As a result, a good reputation or a widely recognized brand could be a valuable asset in e-commerce. New online information services have reduced asymmetric information in retail e-commerce. To make price comparisons more convenient, several companies offer comparison shopping services. These websites enable comparison shopping on the Internet by providing up-to-date price quotes for various products. Very often these websites have reputation systems which collect and distribute information about the past activities of sellers. As a consequence, comparison shopping websites are highly competitive marketplaces where buyers are able to compare prices and risks associated with any particular seller. Comparison shopping websites are popular because many of them are among the 1000 most visited websites on the Internet1. Since large consumer flows can translate into higher revenues, firms have a solid financial incentive to participate in comparison shopping markets. In addition, they offer firms market information about the customer base and a low cost method of monitoring rivals. Comparison shopping markets present a great opportunity to gain insights on the market structures of e-markets. The determinants of market structure are market concentration, product differentiation, the conditions of entry and exit and information (Jacobson and O'Callaghan-Andreosso 1996). In comparison shopping markets, products are identical and the barriers to entry and exit are low. Therefore, market concentration and information will determine market structure. Since market structure determines pricing and profits, studying data from comparison shopping markets helps to understand how market concentration and information shape competition in e-markets. Asymmetric information between buyers and sellers has inspired numerous researchers to inspect the relationship between a seller's reputation and prices in online auctions. Overall, these studies conclude that a good reputation allows some pricing power to sellers2. However, there is considerably less research on burgeoning retail e-markets. Baylis and Perloff (2002) study the e-markets of two homogeneous goods. …