Signaling theory and information asymmetry in online commerce
An e-business environment results in information asymmetry because buyers cannot physically evaluate the quality of products and easily assess the trustworthiness of sellers. Product and seller quality are communicated through website signals. Using signaling theory, we developed a three-dimensional framework to classify website signals. We empirically tested the framework with a comparative content analysis of websites from a sample of online pharmacies. We found that low-quality sellers were likely to avoid costly and easy-to-verify signals and used fewer signals than did high-quality sellers, who used costly and difficult-to-verify signals and displayed more signals. These results provide information to online buyers and regulatory institutions in charge of online retailer evaluation.
signaling theory information asymmetry website signals adverse selection moral hazard