Reputation Formation and the Evolution of Cooperation in Anonymous Online Markets

Theoretical propositions stressing the importance of trust, reciprocity, and reputation for cooperation in social exchange relations are deeply rooted in classical sociological thought. Today’s online markets provide a unique opportunity to test these theories using unobtrusive data. Our study investigates the mechanisms promoting cooperation in an online-auction market where most transactions can be conceived as one-time-only exchanges. We first give a systematic account of the theoretical arguments explaining the process of cooperative transactions. Then, using a large dataset comprising 14,627 mobile phone auctions and 339,517 DVD auctions, we test key hypotheses about the effects of traders’ reputations on auction outcomes and traders’ motives for leaving feedback. Our statistical analyses show that sellers with better reputations have higher sales and obtain higher prices. Furthermore, we observe a high rate of participation in the feedback system, which is largely consistent with strong reciprocity—a predisposition to unconditionally reward (or punish) one’s interaction partner’s cooperation (or defection)—and altruism—a predisposition to increase one’s own utility by elevating an interaction partner’s utility. Our study demonstrates how strong reciprocity and altruism can mitigate the free-rider problem in the feedback system to create reputational incentives for mutually beneficial online trade.

Online Reputation Systems and Cumulative Advantage

The study of online reputation systems and their importance for promoting trust and cooperation and, therefore, the smooth functioning of online markets has received considerable attention over the last few years. In the first part of our talk we will try to give a brief overview of the existing theoretical and empirical work in this field, summarize the main findings from this research and identify open questions where results are either controversial or do not yet exist. The second part of our talk will focus on one of these issues that deserve further research, namely the relation between online reputation systems and processes of "cumulative advantage." Cumulative advantage is the mechanism where a favorable relative position of having a good reputation becomes a resource for further relative gains. The process leads to increased status inequality and a heavily skewed distribution of number of feedbacks, i.e. the ties in the reputation network. We present empirical evidence for direct and indirect reputation effects on the micro level of an auction reputation system and discuss the distributional consequences for the market level.