The Production of a Reputation Premium: Bargain-Hunting and Herding in eBay Auctions

• In Event: 571 - Section on Economic Sociology Roundtables (one-hour)
  In Refereed Roundtable: Table 04. The Embeddedness of Exchange

Abstract

Reputation matters in online auction markets. Sellers with more positive and fewer negative customer ratings receive higher bids and attain higher sales. It has been shown theoretically and empirically that buyers produce this reputation premium by trading off prices against the uncertainty they face with regard to sellers’ trustworthiness. However, finding a good bargain at a low risk of being cheated (or otherwise dissatisfied) is time consuming and therefore costly. Buyers may thus resort to “cheaper” strategies and simply join auctions which have received a bid already. Although such herding will necessarily lead to higher bidding competition, it may be rational if the presence of other bidders is a sign of good item quality and seller reputation. Based on a large sample of eBay auctions of a homogenous good (N ≈ 91,000), we investigate whether buyers’ herd behaviour could undermine eBay’s reputation mechanism. First, we find evidence for herding. The lower the initial price of an item and the earlier an item receives its first bid, the more bidders bid on that item driving up the item’s final price. Second, the herding we observe might be rational because sellers with a better reputation set lower initial prices and receive their first bids earlier. Finally, even after controlling for herding in our statistical analyses, we find a significant and substantial effect of a seller’s reputation on an item’s final price.

Authors

• Wojtek Przepiorka, Utrecht University

• Ozan Aksoy, Oxford University