Self-Regulation for Online Auctions: An Analysis

The most prevalent form of Internet fraud is auction fraud. As fraud affects both the profits of Internet auction houses as well as honest traders of auction goods, they have a mutual incentive to reduce fraud. However, existing research suggests that little effort has been made by the Internet auction industry to control fraud. As a result, there have been increasing calls for government intervention to regulate the Internet auction marketplace. In this study, we perform a grounded theory analysis of fraud in the Internet auction marketplace. Specifically, this research explores the institutions that experienced traders and auction houses employ to reduce the incidence of fraud. Preliminary evidence suggests that, contrary to common perception, the Internet auction industry has developed many sophisticated institutions for combating fraud. These institutions operate primarily by reducing information asymmetries that con artists exploit. However, due to the ease of entry into Internet auction markets, new entrants become easy prey for con artists.