THE IMPACT OF COMPETITION AND REPUTATION FEEDBACK SYSTEMS ON INTERNET TRADING.pdfVIP

THE IMPACT OF COMPETITION AND REPUTATION FEEDBACK SYSTEMS ON INTERNET TRADING * Gary E Bolton Smeal College of Business, Penn State University, USA Claudia Loebbecke Department of Business Administration and Media Management, University of Cologne, Germany Visiting Professor (Fall 2007): Bentley College, USA * Axel Ockenfels Department of Economics, University of Cologne, Germany, Abstract Many Internet trading platforms rely on feedback systems to increase trust and trustworthiness and thus gains-from-trade in anonymous transactions. Competition creates incentives that arguably may enhance or curb the effectiveness of these feedback systems. We investigate how competition for trading partners or for price - compared to the absence of competition - influences the buyers trust and the sellers trustworthiness in a series of laboratory online markets. We find that competition in strangers networks (where market encounters are one shot) most frequently enhances trust and trustworthiness and always increases efficiency. One reason is that reputation feedback trumps pricing. Traders usually do not conduct business