We conducted the first randomized controlled field experiment of an Internet reputation mechanism. A high-reputation, established eBay dealer sold matched pairs of lots --batches of vintage postcards --under his regular identity and under new seller identities (also operated by him). As predicted, the established identity fared better. The difference in buyers' willingness-to-pay was 8.1% of the selling price. A subsidiary experiment followed the same format, but compared sales by relatively new sellers with and without negative feedback. Surprisingly, one or two negative feedbacks for our new sellers did not affect buyers' willingness-to-pay. Page 2 of 2 As the Internet grows as a means of executing transactions, each buyer's array of possible vendors is mushrooming. On auction sites, like eBay, users already buy and sell things from others across the nation and around the world. Despite opening many new venues, this electronic bazaar puts stress on some of the foundations of the traditional market place. In traditional markets, a buyer can usually "squeeze the orange", e.g., inspect the vintage plate, before buying. Beyond this, the hostage of a seller's reputation, possibly built over many years, including the cost of her physical facility and her standing in the community, together with repeat transactions, keeps her honest and diligent. Sales over the Internet lack these tools of reputation. No seller has long been in the electronic market. A seller's physical facility may be her kitchen, and virtually no buyer knows a seller's standing in the community. To be sure, some sellers, such as Dell and L.L. Bean, borrow reputations from elsewhere. However, for tens of thousands of sellers, there is no outside instrument of reputation. In such circumstances, the temptation to sellers to misrepresent products, e.g., exaggerate their quality or misrepresent their provenance, are great. So too is the temptation to sloth, to ship slowly or sloppily after receiving payment. 2 This should lower the price that buyers are willing to pay, since they are forced to assume some risk for the quality and utility of the good being traded. Unless sellers can provide sufficient information about product quality and their own quality in transaction fulfillment, low-quality products and sellers will drive out those of high quality and the market will shrivel (Akerlof 1970). Though disadvantaged in the respects described above, Internet markets also have significant advantages in establishing reputations. First, any information that is gleaned can be near costlessly tallied on a continuing basis, and written assessments can readily be assembled. Second, that information can be near costlessly transmitted to millions of potential customers. (By contrast, word of mouth distribution loses vast amounts of information, with different buyers hearing significantly different assessments of the same seller. It also entails a per-telling cost.) Third, the Internet has the potential, though at present not the reality, for sophisticated processing of information, e.g., using Bayesian calculations, and for using micropayments to induce careful and honest assessments from We conducted the first randomized controlled study of the value of eBay reputations in the natural setting of actual eBay auctions. We were fortunate to secure the collaboration of a highly experienced eBay postcards seller (Swanson). He prepared Page 6 of 6 matched pairs of auction lots, and a random device then determined which lot was sold under his established, extremely high reputation identity, and which lot was sold through newly created, unknown sellers. Roughly similar web sites were prepared for all sellers. Other factors, such as shipping, billing and payment procedures were constant across our sellers. Section II describes the eBay reputation system and examines prior research in more detail. Section III describes our randomized controlled experiment and its results. Section IV discusses the results and discusses their implication. Section V concludes. There are many sites with reputation systems of some sort. The eBay system is undoubtedly the biggest and best known. eBay has millions of items available for bid at any time. The eBay reputation system enables users to leave feedback about interactions with each other. The system is transaction based: to leave feedback for each other, two users must actually have completed an auction. After the auction ends, the buyer and seller each have the opportunity to rate each other's performance with either a 1 (positive), a 0 (neutral), or a -1 (negative). Users also have the opportunity to leave a text comment, and rated individuals can respond to comments that they feel were unfair. Users' net reputation scores are calculated as the count of distinct users who gave positive feedback minus the count of those who gave negative feedback. The seller's net reputation score --positives less negatives --is automatically displayed on the auction page for each item she lists. Hence, potential buyers see this rating before bidding.  II.A Expectations About and Experience with Feedback and We focus on seller reputations, since those for buyers matter little. (The seller can simply wait to get paid and thus incurs little risk.) If buyers are uncertain about seller trustworthiness, they will reward better seller reputations by raising their offers, even though each buyer is only concerned about his own welfare. Indeed, if it is costly to maintain a reputation for high quality, then a good reputation needs to be rewarded by at least the cost of building one. A bad reputation or a decline in reputation should incur a loss that exceeds the benefit from opportunistic behavior (Shapiro 1983). Thus, in equilibrium, a good reputation must command a price premium. 5 Since sellers who get negative feedback can start over relatively easily, buyers need to impose some disadvantage on sellers with no feedback at all (Friedman and Resnick 2001) . 6 Finally, we should expect that buyers will not provide information to help determine seller reputations, since to do so incurs a cost, and free riding is hard to punish. The most striking feature about eBay feedback is that it is so positive. Sellers received negative feedback only 1% of the time, and buyers 2% (RZ). Given their rarity, negatives should be much more consequential than positives in affecting a seller's overall reputation. The specifics of negatives should be much more informative. However, eBay offers no search mechanism to find negatives.  In the last few years, a large number of empirical studies of the effects of eBay's reputation system on sales have been undertaken. We are aware of at least 15, as summarized in Table 1 . 8 One study, BP, follows the logic of a lab experiment, splicing different seller reputation scores into real auction listings and asking subjects to indicate
REF performed a randomized controlled field experiment of eBay reputation mechanism.
The Value of Reputation on eBay: A Controlled Experiment
Experimental Economics
Economics Computer Science Business